Re Insurance Understanding

Copyright 2007 Matthew Bender & Company, Inc., a member of the LexisNexis Group.
. Republished with permission from New Appleman Insurance Law Practice Guide. All rights reserved.
Chapter 40 UNDERSTANDING REINSURANCE

by David M. Raim and Joy L. Langford* I. OVERVIEW
40.01 40.02 40.03 Scope Key Practice Insights Master Checklist
II. APPRECIATING PURPOSE OF REINSURANCE

40.04 Types of Reinsurance 40.04[1] Facultative vs. Treaty Proportional vs. Non-proportional Catastrophe Reinsurance Finite Reinsurance Fronting Arrangements of Privity of Contracts Know General Rule Consider Cut-Throughs
40.04[2] 40.04[3] 40.04[4] 40.04[5] 40.05 Lack 40.05[1] 40.05[2]
III. CONSIDERING REINSURANCE REGULATION

40.06 40.07 40.08 Credit for Reinsurance Letters of Credit Insolvency Clause
IV. CONSIDERING INSURERS OBLIGATIONS TO REINSURERS IN CASE OF CLAIM

40.09 Consider Insurers Notice Obligations 40.09[1] Know What Notice Clause Requires
New Appleman Insurance Practice Guide 40.09[2] Reinsurers Assertion of Late Notice As Defense to Payment of Its Reinsurance Obligations Jurisdictions Requiring Proof of Prejudice Jurisdictions Recognizing Late Notice As Defense Regardless of Ability to Prove Prejudice
40.09[2][a] 40.09[2][b] 40.10
Consider Reinsurers Right to Access Insurers Records 40.10[1] 40.10[2] Consider What Access to Records Clause Requires to Be Made Available to Reinsurer Consider Whether Insurers Disclosure of Privileged Documents to Its Reinsurer Constitutes Waiver As to Third Parties, Including Its Insureds Common Interest Doctrine Disclosure Made Prior To Insurance Coverage Litigation Disclosure Made During Course of Insurance Coverage Litigation Disclosure Made After Resolution of Insurance Coverage Litigation But Prior to Institution of Arbitration or Litigation Between Cedent And Reinsurer Disclosure Made During Course of Reinsurance Litigation Use of Condentiality and Common Interest Agreements
40.10[2][a] 40.10[2][b] 40.10[2][c] 40.10[2][d]
40.10[2][e] 40.10[2][f] 40.10[3]
Consider Reinsurers Ability to Compel Production of Cedents Privileged Documents Consider Whether Inclusion of Access to Records Clause Constitutes Waiver Know When Privileged Documents Are In Issue Therefore Requiring Production by Cedent Consider Application of Common Interest Doctrine to Compel Production of Cedents Privileged Documents
40.10[3][a] 40.10[3][b] 40.10[3][c]
40.10[3][c][i] Prior to Dispute Between Cedent and Reinsurer 40.10[3][c][ii] During Reinsurance Dispute Between Cedent and Reinsurer 40.10[4] 40.11 Understand When Insured Is Entitled to Discover Its Insurers Reinsurance Information
Consider Reinsurers Rights Under Right to Associate Clause or Claims Control Clause
40-2
Understanding Reinsurance
V. CONSIDERING REINSURERS OBLIGATIONS

40.12 40.13 40.14 Determine Extent of Coverage Consider Obligation to Reimburse Insurer for Declaratory Judgment Expense Consider Obligation to Reimburse Insurer for ExtraContractual Obligations and Excess of Policy Limits (ECO/ XPL) Damages
VI. CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE FIDEI

40.15 40.16 Consider Insurers Duty to Disclose to Reinsurer All Material Facts About Risk Being Reinsured Consider Application of Duty of Utmost Good Faith Beyond Disclosure at Inception of Reinsurance Relationship 40.16[1] 40.16[2] 40.16[3] 40.16[4] Application of Duty of Utmost Good Faith to Parties Conduct During Life of Reinsurance Contract Application of Duty of Utmost Good Faith to Underwriting and Administration of Ongoing Business Application of Duty of Utmost Good Faith to Obligation to Give Notice of Claim Application of Duty of Utmost Good Faith to Reinsurer to Pay Under Reinsurance Agreement
VII. CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE SETTLEMENTS

40.17 40.18 40.19 Understand Distinction Between Follow the Fortunes and Follow the Settlements Consider Reinsurers Preclusion from Second-Guessing Reinsureds Good Faith Claims Decisions Consider Application of Follow the Fortunes/Follow the Settlements to Allocation Decisions
VIII. CONSIDERING BROKERED MARKET

40.20 40.21 Brokered vs. Direct Market Understand Which Entity Broker Represents
40-3
New Appleman Insurance Practice Guide
IX. CONSIDERING REINSURANCE ARBITRATION

40.22 40.23 40.24 40.25 40.26 40.27 40.28 40.29 Consider Obligation to Arbitrate Neutral Panel or Party Advocate System Strict Rule of Law vs. Obligations Pursuant to Honorable Engagement Discovery in Arbitration Summary Disposition in Arbitration Reasoned Awards Know When to Move to Vacate or Afrm Arbitration Award ARIAS Forms
X. FORMS
40.30 40.31 40.32 40.33 40.34 40.35 40.36 40.37 40.38 40.39 40.40 40.41 40.42 40.43 40.44 40.45 40.46 40.47 BRMA Reinsuring Clause Form 44 C (Quota Share Agreement) BRMA Reinsuring Clause Form 44 B (Surplus Share Agreement) BRMA Reinsuring Clause Form 61 C (Excess of Loss Agreement) BRMA Unauthorized Reinsurance Clause Form 55 A BRMA Insolvency Clause Form 19 M BRMA Offset Clause Form 36 A BRMA Loss Notice Clause Form 26 B Notice of Loss Clause Incorporating Right to Associate BRMA Loss Notice Clause Form 26 A BRMA Access to Records Clause Form 1 B BRMA Condentiality Clause Form 69 D BRMA BRMA BRMA BRMA BRMA Claims Cooperation Clause Form 8 A Excess of Original Policy Limits Clause Form 15 A Extra Contractual Obligations Clause Form 16 D Intermediary Clause Form 23 A Arbitration Clause Form 6 A
BRMA Arbitration Clause Form 6 E ARIAS-U.S. Umpire Questionnaire Sample Form 2.1
40-4
I.
OVERVIEW.
40.01 Scope. In essence, reinsurance is insurance for insurance compa-
nies. It is a contractual arrangement under which an insurer secures coverage from a reinsurer for a potential loss to which it is exposed under insurance policies issued to original insureds. The risk indemnied against is the risk that the insurer will have to pay on the underlying insured risk. Because reinsurance is a contract of indemnity, absent specic cash-call provisions, the reinsurer is not required to pay under the contract until after the original insurer has paid a loss to its original insured. Reinsurance enhances the fundamental nancial risk-spreading function of insurance and serves at least four basic functions for the direct insurance company: increasing the capacity to write insurance (under prevailing insurance-regulatory law); stabilizing nancial results in the same manner that insurance protects any other purchaser against spikes from realized nancial losses; protecting against catastrophic losses; and nancing growth. The reinsurance relationship is structured in the following manner: original insured > insurer > reinsurer. The insurer is called, for reinsurance purposes, the cedent (or cedant). There is typically no contractual relationship between the reinsurer and the original insured. Reinsurance may, but need not, dovetail with the scope of the original insurance. Basically, all of the risks that are insured can be reinsured, unless contrary to public policy under the relevant governing law for the reinsurance contract. This chapter principally discusses how insurance claims and coverage litigation can evolve into reinsurance claims and in that context presents the most common legal issues that arise from reinsurance relationships. The coverage afforded insurers through the most commonly purchased types of reinsurance is explained to provide a context for most reinsurance claims. Certain aspects of reinsurance regulation are set forth to illustrate the role of reinsurance in the entire insurance scheme and the payment of policyholder claims. Also described are the special rights and obligations of cedents and reinsurers as between them and important aspects of reinsurance arbitration (the common form of dispute resolution), both of which strongly inuence reinsurance recoveries. This chapter provides a background in reinsurance and explains how an insureds relationship with its insurer ts within the context of the entire reinsurance scheme. Reinsurance, like many areas of business law, has a language of its own. The insurance company purchasing reinsurance is called the ceding company (or the cedent (or cedant), reinsured or ceding insurer) because it cedes or transfers part of the risk. The company selling 40-5
40.01
reinsurance is called the reinsurer. Typically, these are the only parties to the reinsurance agreement; all rights and obligations run only between them. The reinsurance contract does not change the direct, or original, insurers responsibility to its policyholder (the original insured or policyholder), and the insurer must fulll the terms of its policy whether or not it has reinsurance or whether or not the reinsurer is rightly or wrongly refusing to perform. The liability or risk ceded is called a cession, and the original policy that the cedent issues to a policyholder is referred to as direct insurance. A reinsurer also can purchase its own reinsurance protection, and such reinsurance of reinsurance is called a retrocession. A reinsurer that transfers all or part of its assumed reinsurance is called a retrocedent, and the company reinsuring this risk is called the retrocessionaire. Retrocessions need not incorporate the original reinsurance and often do not. (Retrocessionaires in turn can purchase reinsurance again, ad innitum.) Reinsurance relationships can be simple or complex. A cedent can cede certain loss exposures under one contract or purchase several contracts covering different aspects or portions of the same policy to achieve the desired degree of coverage. A layering process involving two or more reinsurance agreements is commonly employed to obtain sufficient monetary limits of reinsurance protection. When a claim is presented, the reinsurers respond in a predetermined order to cover the loss. The reinsurance relationship is evidenced by a written contract reecting the negotiated terms. Although reinsurance contracts between different cedents and reinsurers can include clauses with similar purposes, the wording of particular provisions varies signicantly, depending on the parties specic needs, customs and practices. Sample clauses are provided where instructive. Payments that are due pursuant to a reinsurance agreement are considered an asset of the cedent; in contrast to other types of contingent payments, the applicable regulatory regime may permit the cedent to count a reinsurance recoverable as a present asset on its own balance sheet. Reinsurance is payable only after the cedent has paid losses due under its own insurance agreements. However, most U.S. reinsurance contracts include an insolvency clause, which allows the receiver of an insolvent insurer to collect on reinsurance contracts as if the insolvent insurer had paid the claim in full even if it did not [see 40.08 below discussing the insolvency clause]. Reinsurance should not be confused with other commercial arrangements. It is not co-insurance, where separate insurers assume shares of the same insurance risk. Nor is it a novation as between the original insured and its 40-6
40.01
insurer or substitution of one insurer for another. A reinsurance agreement does not establish a partnership between the insurer and the reinsurer or a separate joint venture as between them, although some pro rata contracts provide that the parties share proportionally in the premiums collected by the cedent and in losses paid by it. Reinsurance ordinarily does not confer third-party beneciary status on the original insured. Absent a cutthrough clause or similar modication [see 40.05 below for discussion of these exceptions], there is no privity of contract between the insurance policyholder and the reinsurer. In the absence of language in the reinsurance agreement granting the original insured rights against the reinsurer or unusual factual circumstances, attempts by original insureds to sue reinsurers directly generally fail; claimants against the original insureds similarly are unsuccessful in bringing suit directly against reinsurers, even where, in direct-action states or in other circumstances, the claimant might be able to sustain an action against the original insurer (cedent). Underlying claims and coverage litigation can trigger reporting and notice obligations of cedents to reinsurers. Reinsurers that potentially owe indemnity may commence investigations, monitor claims, and establish claim reserves. Counsel for original insureds in coverage litigation sometimes seek production of communications generated between the cedent and reinsurer on the grounds that insurance covering a defendant is generally discoverable (even though in the circumstance the insurance is reinsurance), or for more narrowly tailored purposes such as to collect evidence that the original insurance policy existed at one time even if it is no longer is available. In some instances, the disclosure of cedent/ reinsurer communications can potentially be detrimental to the cedents coverage position vis-a-vis its insured. Typical reinsurance claim issues that are discussed here include: reporting and notice obligations; defenses stemming from interpretation of the reinsurance wording to the indemnity sought; cooperation and claimhandling obligations; and defenses seeking rescission of the reinsurance contract including nondisclosure and misrepresentation with respect to the details of risk. The nature of the reinsurance relationship especially the notion of utmost good faith or uberimae dei may provide a gloss on how certain issues get resolved in the reinsurance context that may differ from how similar issues are resolved in the ordinary insured-insurer context. Other common issues addressed here include the reinsurers obligations to indemnify the insurer for declaratory judgment expenses incurred in defending or prosecuting coverage litigation against the original insured, and payments by insurers in excess of policy limits or payments of extracontractual damages. 40-7
40.02
Reinsurance claims generate certain legal issues distinct from issues that typically arise in the context of direct insurance. Rules found in insurance law in different arenas may not apply or may apply with different nuances in the context of reinsurance disputes, and the duties and obligations between a cedent and reinsurer may differ from those between an original insurer and policyholder, considering some of the differences in the relative sophistication and bargaining power, custom and practice, or different aspects in which one party is largely dependent upon another. Several important distinctions between the resolution of insurance and reinsurance disputes are examined in this chapter, including the effect of the bilateral duty of utmost good faith, which is perhaps unique to reinsurance agreements. Reinsurance disputes also are distinguished by their typical resolution through arbitration, rather than courtroom litigation. Among other differences, in typical U.S. arbitrations, the availability and weight of legal precedent is less predictable and meaningful than in litigation in the courts. Arbitrators may not be bound by strict legal rules and do not always strictly apply contract law and other legal principles to reinsurance agreements; indeed, some reinsurance contracts eschew reliance upon legal rules in favor of construing the reinsurance relationship memorialized by the reinsurance contract as principally an honorable engagement pursuant to industry custom and practice.
Lexis.com Searches: To nd statistics on reinsurance premiums, try
this source: RDS TableBase. Enter this search: PUB(Reinsurance). To nd articles on specic cases involving reinsurance, try this source: Reinsurance: Mealeys Litigation Report. Enter specic search terms or date ranges.
40.02 Key Practice Insights. The parties to reinsurance contracts are
typically sophisticated insurers transferring the nancial risk assumed in insuring businesses, homes, cars and individuals. Note that sometimes reinsurers create the instrument that is to be sold to an insured and then look for a middleman (cedent) to (i) issue the policy to the insured and (ii) purchase the corresponding reinsurance. Indeed, in such transactions, sometimes the cedent will 100 percent reinsure the risk undertaken to the policyholder, in exchange for a ceding commission deducted from the premium collected from the direct insured, which is ultimately passed on to the reinsurer. There are no standard reinsurance contracts, although many include commonly used provisions and clauses sometimes required by state law. Each reinsurance treaty or facultative certicate reects the special needs of the parties with respect to the type and amount of risk covered, the 40-8
40.02
calculation of the premium, the role of the reinsurance intermediary, the method and timing of notice and submission of claims, various reporting obligations, and resolution mechanisms for potential disputes. Reinsurance contracts therefore are often complex and unique and must be carefully drafted and, in the event of dispute, carefully interpreted. Lawyers practicing in the reinsurance eld must become familiar with the specialized business of reinsurance, including the purposes and types of reinsurance and the nancial goals and consequences typically involved. Practitioners also must be knowledgeable about the meaning, use and legal effect of commonly employed reinsurance contract provisions, including insolvency, access to records, claims control, notice, extracontractual obligations (ECO), excess of policy limits (XPL), follow the fortunes/settlements, intermediary and arbitration provisions. Attorneys also should carefully review complete versions of reinsurance wordings, including endorsements and amendments. (Indeed, sorting out which is the governing wording particularly when insurers operating in different markets or in different countries are involved can prove tedious and time consuming.) Although regulation of the reinsurance industry in the United States is more limited than that of the insurance industry in general, lawyers should be mindful of the insurers statutory licensing, solvency and accounting requirements. Attorneys should understand how insurers must account for nite risk reinsurance, as this subject recently has attracted signicant regulatory attention. Also of particular concern are fronting arrangements and cut-through endorsements, which may not be allowed or may be subject to special regulations in certain jurisdictions. Reinsurance disputes are typically resolved through arbitration, and practitioners should be familiar with arbitration law, particularly the Federal Arbitration Act (FAA) and statutory law applicable to nonadmitted reinsurers and the availability of pre-answer or pre-judgment security. Of course, counsel handling a dispute should be familiar with how reinsurance arbitrations are generally handled. A thorough knowledge of the reinsurance industry is needed as many issues are decided based upon the custom and practice in the industry (especially where the arbitration panel is comprised of non-lawyers, as is often the case). Lawyers also should know that leading industry and professional organizations offer practice guides, forms, and other resources useful for reinsurance arbitrations (such as lists of professional trained reinsurance arbitrators). 40-9
40.03
40.03 Master Checklist.
Understand whether the reinsurance contract at issue is a facultative certicate or a treaty.

Discussion: 40.04[1]
Understand whether the reinsurance at issue is proportional or non-proportional.

Discussion: 40.04[2] Forms: 40.30-40.32
Become familiar with specic types of reinsurance such as catastrophe reinsurance, clash cover and nite reinsurance.
Discussion: 40.04[3]-40.04[4]
Understand how insurers must account for nite risk reinsurance under applicable regulations.
Determine all of the parties responsibilities and liabilities in a fronting arrangement, including any obligation to monitor a managing general agency.
Conrm that fronting is permissible in the jurisdiction where the arrangement is executed.
Determine if special circumstances exist which may provide grounds for a policyholder of the ceding insurer to assert a direct action against the reinsurer.
Research the legality and enforceability of cut-through clauses (or assumption of liability endorsements) contained in insurance contracts covered by reinsurance.
Understand the credit for reinsurance laws governing your reinsurance transaction. 40-10
Understanding Reinsurance Discussion: 40.06
40.03
Conrm that a letter of credit obtained by a ceding company that intends to take nancial statement credit for reinsurance placed with a non-admitted reinsurer complies with statutory requirements.
Discussion: 40.07
Ensure that an adequate insolvency clause is included in the reinsurance contract if required in your jurisdiction. Most states require that the reinsurance contract include an insolvency clause for the ceding insurer to take credit for reinsurance on its nancial statement.
Discussion: 40.08 Form: 40.34
Understand the effect of an offset clause, or any applicable common law or statutory set-off rights, on the rights and obligations under the reinsurance agreement.
Understand the requirements of the reinsurance contracts notice provision.

Discussion: 40.09[1] Forms: 40.36-40.38
Determine whether, in your jurisdiction, the reinsurer must demonstrate prejudice in order to successfully assert a late notice defense.
Understand the effect of an access to records clause in the reinsurance agreement.

Discussion: 40.10[1] Form: 40.39
If your client is the ceding insurer, beware the consequences of 40-11
40.03
disclosing privileged information to reinsurers pursuant to an access to records clause.

Research the applicability in your jurisdiction of the common interest doctrine to a cedents disclosure of privileged communications to its reinsurer.
Discussion 40.10[2]
Determine whether the parties to a reinsurance contract should execute a condentiality or common interest agreement to try to preserve applicable privileges or immunities against disclosure to third parties.
Discussion: 40.10[2][f]
Understand the circumstances under which a reinsurer can compel disclosure of its cedents privileged communications.
Understand the circumstances under which an insured will be entitled to discover its insurers reinsurance information.
Become familiar with the rights and obligations presented by right to associate and claims control clauses in reinsurance contracts.
Discussion: 40.11 Forms: 40.41
Draft the reinsuring or business covered clause of the reinsurance agreement carefully to avoid disputes concerning the scope of coverage.
Discussion: 40.12
Understand whether the reinsurance contract wording (in many cases the denition of allocated loss expenses) obligates the reinsurer to reimburse its cedent for declaratory judgment expenses.
Discussion: 40.13
Understand the coverage provided by excess of policy limits 40-12
40.03
(XPL) and/or extra-contractual obligations (ECO) clauses in the reinsurance contract.

Discussion: 40.14 Forms: 40.42-40.43
Understand the duty of utmost good faith that is central to the relationship between cedent and reinsurer.
Discussion: 40.15
If your client is the cedent, determine the facts that must be disclosed during the underwriting process.
Discussion: 40.15
If your client is the cedent, ensure that all proper and businesslike steps are taken in underwriting the underlying business and in settling claims.
Understand the effect of follow the fortunes or follow the settlements wording in the reinsurance contract.
Discussion: 40.17 Cross References: 40.18-40.19
Determine the extent to which follow the fortunes or follow the settlements language in the reinsurance contract requires a reinsurer to follow its cedents allocation and aggregation decisions as respects it direct insurance obligations.
Discussion: 40.19
Understand the obligations of the reinsurance intermediary.

Discussion: 40.20
Determine whether, and for what purposes, the reinsurance broker or intermediary is the agent of the ceding company, the reinsurer, or both parties.
40-13
40.03
Understand what disputes are arbitrable under the reinsurance contracts arbitration clause.
In drafting reinsurance agreements, counsel should determine whether the scope of the arbitration clause in the reinsurance contract is intended to be broad or narrow.
Arbitration counsel should consider whether non-signatories to the arbitration agreement may be forced to arbitrate.
Discussion: 40.22
Consider whether or not to include consolidation and joinder provisions in an arbitration agreement, or whether to request consolidation once arbitration has commenced.
Consider what procedures should be included in the arbitration provision concerning the selection of arbitrators and/or umpires, what qualications the arbiters should have, and whether the arbiters should be neutral or non-neutral.
Discussion: 40.23
Make certain that your client appoints its arbiter on a timely basis.
Discussion: 40.23
Become familiar with the standards and procedures for selecting arbitrators and the lists of qualied individuals published by arbitration and reinsurance organizations.
Understand the effect of any honorable engagement wording in the 40-14
40.03
reinsurance agreement.
Counsel drafting a reinsurance contract should determine whether specic discovery procedures should be included in the reinsurance contracts arbitration provision and, if so, whether they should incorporate any procedures published by reinsurance or arbitration organizations.
Discussion: 40.25
Counsel should determine how and whether a reinsurance intermediary can be required to participate in the discovery process in the event of a reinsurance arbitration.
Discussion: 40.25
Arbitration counsel should consider whether to submit a motion for summary disposition of a reinsurance claim or dispute.
Discussion: 40.26
Arbitration counsel should consider whether to move to conrm a favorable arbitration award in court.
Discussion: 40.28
Arbitration counsel should consider whether grounds exist to move to vacate an arbitration award in court.
Discussion: 40.28
Arbitration counsel should consider whether there are grounds to request a court to modify or correct an arbitral award.
Discussion: 40.28
Become familiar with the forms provided by ARIAS.

40-15
II.
APPRECIATING PURPOSE OF REINSURANCE.
40.04 Types of Reinsurance. 40.04[1] Facultative vs. Treaty. There are two basic types of reinsur-
ance: treaty and facultative. Facultative reinsurance is a contract only covering all or part of a single specic policy of insurance. For each transaction sought to be reinsured, the reinsurer reserves the faculty to accept or decline all or part of any insurance policy presented, and the cedent chooses whether to secure reinsurance for a particular policy. The reinsurer and cedent negotiate the terms for each facultative certicate. Facultative reinsurance is commonly purchased for large, unusual or catastrophic risks. Reinsurers thus must have the necessary resources to underwrite individual risks carefully. (Treaty reinsurance, discussed further below, involves a preexisting commitment by the reinsurer to cover a predetermined class and amount of coverage that will be sold by the insurer-cedent.) Other uses of facultative reinsurance include: 1. When an insurer is offered a risk that exceeds its standard underwriting or reinsurance limits for that class, facultative reinsurance can permit the ceding company to accept the risk. Insurers can ll gaps in coverage caused by reinsurance treaty exclusions by seeking separate facultative coverage for a specic policy or group of policies. A reinsurer can issue facultative reinsurance to participate in a market in the short term to minimize risk and take advantage of favorable rates. A treaty reinsurer may purchase facultative reinsurance to protect itself and its treaty reinsurers.
2.
3.
4.
Insurers sometimes purchase both facultative and treaty reinsurance to cover the same risk. Unless there are contract terms to the contrary, the facultative reinsurance will perform rst and completely before any of the treaty reinsurance performs. Sometimes the facultative reinsurance only applies to the ceding companys net retention; other times facultative coverage also inures to the benet of the treaty reinsurers. Ideally, the wording of the facultative certicate will make this clear. As a general matter, whether the facultative reinsurance inures to the benet of the treaty reinsurers will depend on whether the treaty reinsurers paid a portion of the premium for the facultative 40-16
40.04[1]
coverage. If not, the facultative reinsurance likely will not inure to the treaty reinsurers benet. Facultative certicates are often one or two page documents. The front of a typical contract identies the parties, the underlying policyholder and policy number reinsured, amounts of the policy ceded and retained, the type of reinsurance (proportional or nonproportional) and the premium. The back of each certicate usually contains the following provisions: notice of loss; net retention; coverage for loss adjustment expenses; claims handling; cancellation; insolvency; tax; offset and intermediaries. Many facultative certicates do not include an arbitration provision [see 40.22 below for a discussion of arbitration clauses in reinsurance agreements]. Treaty reinsurance, the most common form of reinsurance, covers some portion of a dened class of an insurance companys business (e.g., an insurers products liability or property book of business). Reinsurance treaties cover all of the risks written by the ceding insurer that fall within their terms unless exposures are specically excluded. Thus, in most cases, neither the cedent nor the reinsurer has the faculty to exclude from a treaty a risk that ts within the treaty terms. Therefore, treaty reinsurers rely heavily on the cedents underwriting. Treaty relationships are often long-term; treaties sometimes are renewed automatically unless a change in terms is requested. A typical treaty can include thirty or forty articles or clauses which describe the class or classes of business covered, the type of treaty (proportional or non-proportional), the amount of reinsurance provided and details about the parties obligations with respect to treaty operation.
Cross Reference: For a thorough discussion of the distinction
between facultative and treaty reinsurance, see Compagnie de Reassurance DIle de France v. New England Reinsurance Corp., 825 F. Supp. 370 (D. Mass. 1993), affd in part and revd in part, 57 F.3d 56 (1st Cir. 1995).
z Strategic Point: Reinsurance treaties that run consecutively for
many years can present certain difficulties in terms of claims processing. Contracts are often amended by endorsements which can add or delete reinsurers, change premium or ceding commission rates or add, delete or alter important contract terms. These changes may be retroactive to contract inception or have a different effective date. Practitioners evaluating indemnity under reinsurance treaties must take care to review complete versions of 40-17
40.04[2]
the wordings, including endorsements and amendments.

40.04[2] Proportional vs. Non-proportional. Proportional or pro-rata
reinsurance is characterized by a proportional division of liability and premium between the ceding company and the reinsurer. The cedent pays the reinsurer a predetermined share of the premium, and the reinsurer indemnies the cedent for a like share of the loss and the expense incurred by the cedent in its defense and settlement of claims (the allocated loss adjustment expense or LAE). According to the percentage agreed, the cedent and reinsurer share the premium and losses from the business reinsured. Proportional reinsurance spreads the risk of loss and creates a broad identity of interests between the cedent and the reinsurer, which effectively co-venture in relationship to their relative shares of the risk, even though only the cedent has contractual privity with the direct insured. The two most common types of proportional reinsurance are quota share and surplus share reinsurance. Under quota share reinsurance, the reinsurer assumes an agreed percentage of each risk from the rst dollar, up to any limit assigned. For example, if there is a $100 loss under a 40 percent quota share reinsurance contract, the cedent would bear $60 of that loss and the reinsurer concurrently would bear $40 of that loss. The percentage always reects the percentage of loss borne by the reinsurer. The portion of the risk that the reinsurer assumes is called the ceded risk, and the portion that the cedent keeps is referred to as the reinsurance retention. Although it is not a partnership, quota share reinsurance presents a greater identity of interests between the ceding insurer and the reinsurer than does excess of loss reinsurance (discussed below). Surplus share is similar to quota share reinsurance in that premiums and losses are shared on a proportional basis, but differs in that the portion of the reinsured policy the direct insurer retains is expressed as a xed monetary amount, and the reinsurance may or may not apply from the rst dollar (i.e., the reinsurance may apply only in excess of the xed dollar amount or the cedent and reinsurer may together share losses as they are incurred until the cedent incurs an amount equal to its overall retention). Premium is shared based on the ratio of retained liability, and the reinsurer agrees to pay the same pro rata portion of any loss and expense incurred by the cedent.
Examples: Where the policy limit is $150,000, and the cedents
retention is $25,000, the amount ceded to the reinsurer is $125,000 40-18
40.04[2]
and the ratio of what is ceded to what is retained is 5:1. Losses therefore will be shared in that proportion. For a loss of $100,000, the cedent is responsible for $16,667 and the reinsurer pays ve times more, or $83,333. In addition, in surplus share reinsurance contracts, the proportion of premium and liability ceded can vary, at the cedents option, from risk to risk. Although it can be advantageous for the direct insurer to vary the percentage of premium and liability ceded for each risk, these variations make a surplus share contract more difficult to administer than a simple quota share. Under non-proportional or excess of loss reinsurance (sometimes referred to as XL or XOL), the reinsurers liability is not triggered until the cedents losses exceed a specied monetary amount, called the retention. If losses to the ceding company are less than the retention, the reinsurer owes nothing. The reinsurance agreement will include a limit of liability for each claim above which the reinsurer is not obligated to pay. Excess of loss reinsurance can be provided on an individual risk, an occurrence or an aggregate basis, and is typically placed in layers. Non-proportional reinsurance tends to cost less than does quota share reinsurance because the reinsurer does not participate in every loss. However, because the level of risk under non-proportional reinsurance depends on the nature of the reinsurance undertaking, there is a great deal of uncertainty with this coverage. In addition to the underlying risk, reinsurers must consider the layer of coverage on which it will participate. Whether a potential cedent seeks to obtain or place coverage on a rst dollar basis versus excess of loss reinsurance depends on several factors, including the cedents anticipated loss prole. For example, if the cedent expects to incur frequent losses at low levels, it may make economic sense for the cedent to secure quota share reinsurance, so it has some protection for even the smallest losses. In contrast, if the cedent expects to have infrequent losses at signicant levels or wishes to guard against risk of a signicant loss, it may choose to purchase excess of loss coverage.
z Strategic Point Reinsurer: Because non-proportional reinsur-
ance is characterized by unpredictability and potentially high losses, XOL reinsurers may incur a disproportionate share of total losses. This is especially problematic with respect to long tail lines of insurance where the incidence of loss and determination of damages can extend well beyond the period in which the insurance or reinsurance is in force. In such cases, premiums may 40-19
40.04[3]
be received long before liability is manifested or developed, and liability may be difficult to estimate because it is determined by the prevailing legal or economic environment in the future. (On the other hand, the reinsurer is able to hold on to the premium paid by the cedent for a longer period, offering it the opportunity to earn out losses through investment return.) Examples of long-tail lines of insurance include malpractice, products liability, and errors and omissions.
Cross Reference: For discussion of the advantages and disad-
vantages of proportional and non-proportional reinsurance contracts, see Eric Mills Holmes, Appleman on Insurance 2d 102.3.
Cross References: For an example of a reinsuring clause for a quota share reinsurance agreement, see 40.30 below. For an example of a reinsuring clause for a surplus share reinsurance agreement, see 40.31 below. For an example of a reinsuring clause for an XOL reinsurance agreement, see 40.32 below. 40.04[3] Catastrophe Reinsurance. Catastrophe reinsurance is a form
of excess of loss reinsurance which, subject to a specic limit, indemnies the cedent for the amount of loss in excess of its retention with respect to an accumulation of individual losses affecting multiple policies resulting from a catastrophic event. Rather than single large losses, even an unexpected number of such losses within the reinsurance policy term, catastrophe coverage principally provides protection for the cedent against the concentration of several losses, each of which may stem from different direct insureds but which altogether arise from a common event (or closely related series of events). The reinsurance contract is typically called a catastrophe cover. Catastrophe reinsurance can be provided on an aggregate basis with coverage for losses over a certain amount for each loss in excess of a second amount in the aggregate for all losses in all catastrophes occurring during a certain time period (often one year). Catastrophe cover is typically secured to protect the cedent against an intolerable accumulation of actual loss and to stabilize its underwriting experience. Another variant of reinsurance purchased by insurers is clash cover, which requires two or more coverages or policies issued by the reinsured to be involved in a loss, for coverage to apply. This reinsurance typically attaches above the limits of any one policy. Clash covers are often catastrophe covers. 40-20
40.04[4]
Cross Reference: For discussion of the typical terms of catastrophe cover, see Eric Mills Holmes, Appleman on Insurance 2d 102.3[B][2]. 40.04[4] Finite Reinsurance. There is no generally accepted denition
of nite risk (sometimes called nancial) reinsurance. Broadly speaking, it is a form of reinsurance that carefully controls and limits the amount and type of risk transferred to the reinsurer, but often involves the transfer of money, a return premium from the reinsurer, to the cedent as a result of how losses developed under the reinsurance contract. Finite reinsurance can be distinguished from other non-nite or traditional types of reinsurance based on the extent to which there are limitations on the underwriting risk, the risk that the amount of losses will exceed premiums. Participants in nite risk reinsurance transactions tend to focus primarily on nancial risks, such as timing risk (the risk that losses will need to be paid sooner than expected), investment risk (the risk that the reinsurer will earn less investment income than expected on the reinsurance premium) and credit risk (the risk that the cedent will not make the required premium payments). Finite risk reinsurance contracts are typically treaties that are closely tailored to meet the particular needs of a cedent. They can be quota share or excess of loss treaties and may cover losses that have yet to be quantied or to have occurred at all or losses that have already occurred in part but where the amount and timing of the loss is still uncertain. Finite risk reinsurance contracts often include some or all of the following: 1. 2. A ceiling on the amount of underwriting risk assumed by the reinsurer; An explicit recognition of the time value of money through the use of experience accounts funded by large reinsurance premiums, which accumulate investment income over time and fund the loss payments; Inclusion of a commutation clause that allows for prot sharing between the cedent and reinsurer based on the nancial results of the reinsurance contract; Multi-year contracts that allow the cedent to mitigate volatility by recognizing a loss gradually, rather than all at once.
3.
4.
Finite risk transactions are legitimate and widespread, though some forms of transactions have been criticized as being in substance 40-21
40.04[4]
distinguished loans but which as something other than a loan obtains more favorable tax or accounting treatment (until challenged). The key issue is how to account for the transaction. If there has been sufficient risk transfer, the contract can be accounted for as reinsurance. If not, then contract deposit accounting is appropriate.
t Warning: Signicant regulatory attention has recently been
directed at how insurers account for nite risk reinsurance and whether the principal objective of these transactions is untethered from an underlying business rationale but instead is designed to improve the appearance of the balance sheet of the cedent (and thus implicitly, or so the argument goes, to mislead investors and regulators as to the true nancial condition of the cedent). Insurers and reinsurers in the United States and elsewhere have been investigated by the SEC, state Attorneys General, state Insurance Departments, and other law-enforcement officials with jurisdiction. A common element in many of the nite risk reinsurance transactions under attack by regulators is an allegation that the transactions were presented and accounted for as if they genuinely transferred material risk, when in fact the transactions did not do so and thus were more in the nature of loans or deposits on account. They were instead allegedly intended only to achieve a particular result on a companys balance sheet what is sometimes referred to as nancial engineering or more commonly smoothing of earnings.
Example: Effective in 2006 and 2007, the National Association of
Insurance Commissioners (NAIC) amended the disclosure requirements for companies that purchase nite risk reinsurance, and the new requirements demand substantial and ongoing management attention. The new requirements include several new interrogatories (which are part of the General Interrogatories section of the Annual Statement) that apply to ceded reinsurance and are intended to identify reinsurance agreements that have characteristics of contracts which the regulators have identied as prone to abuse and which warrant closer review. For example, under Interrogatory 9.1, the reporting company is asked to identify any ceded reinsurance which meets three conditions: (1) the agreement alters surplus by more than 3% (positive or negative) or represents more than 5% of premiums or losses; (2) the contract was accounted for as reinsurance and not as a deposit; and (3) the contract has one or more of the following features or other features that would have similar results: 40-22
40.04[4]
non-cancelable contract terms longer than two years; a provision whereby cancellation triggers an obligation by the ceding company or an affiliate to enter into a new contract with the reinsurer or an affiliate; aggregate stop loss reinsurance coverage; an unconditional or unilateral right by either party to commute, unless triggered by a decline in the counterpartys credit status; a provision permitting reporting or payment of losses less frequently than quarterly; payment schedule, accumulating retentions from multiple years or any features inherently designed to delay timing of cedent reimbursement (e.g. experience accounts).
In the event conditions (1), (2) and (3) are satised, the reporting company must provide certain supplemental information including: (a) a summary of the terms of the responsive contracts; (b) a brief discussion of the principal objectives and economic purpose for entering into the contract; and (c) the aggregate nancial statement impact of all such contracts on the balance sheet and income statement. A second interrogatory (9.2) is intended to ferret out additional arguably abusive reinsurance arrangements. Here, the reporting company must identify any ceded risks (other than to captives or under approved pooling arrangements) for which it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders where: (1) the ceded written premium is 50% or more of the entire direct and assumed premium written by the assuming reinsurer, based on its most recent nancial statement; or (2) twentyve percent or more of the written ceded premium has been retroceded back to the ceding company in a separate reinsurance contract. Cessions by or to affiliates, including multiple contracts with the same reinsurer or its affiliates, are included in determining if the conditions are met. If either condition 1 or 2 of this interrogatory is met, the reporting company must provide the same supplemental information noted above. An additional interrogatory (9.4) requires the cedent to identify 40-23
40.04[4]
contracts that it has accounted for as reinsurance for statutory accounting purposes yet accounted for as a deposit for GAAP purposes (or vice versa). For any such contract, an explanation for the differing treatment must be provided in a supplemental ling. The NAIC also now requires CEOs and CFOs to complete a Reinsurance Attestation Supplement that is similar to provisions of the Sarbanes-Oxley Act (SOX), for all reinsurance contracts for which the reporting entity is taking credit on its current nancial statement. The attestation includes the following four parts, which share in the common objectives to encourage transparency and auditability for reinsurance transactions of certain forms and to memorialize, preferably concurrent to entry into the reinsurance contract in question, the underlying business rationale and purpose for the transaction as a safeguard against market participants coopering up paper with or without oral side deals that negate the apparently legitimate business objective of the paperwork.
Consider: Note that this regulatory purpose is not to preclude
participants from making ill-considered, underpriced, or even foolish deals shareholders may have other recourse for such non- or misfeasance; instead, preservation of the integrity of the largely self-reported nancial and insurance regulatory systems is meant to be buttressed through these disclosure requirements. 1. No side agreements exist, written or oral, that would under any circumstances reduce, limit, mitigate or otherwise affect any actual or potential loss to the parties. This prong of the attestation applies to every reinsurance contract, and not just to those that may be characterized as nite in nature or appearance. Verifying the absence of all such oral and written arrangements as to all contracts will likely require both documentary review and interviews of underwriting personnel, perhaps even including prior employees. Companies and their auditors should develop a plan for accomplishing this review and documenting its methodology and results. For reinsurance contracts entered into, renewed or amended after January 1, 1994, for which risk transfer is not reasonably considered to be self-evident, there is documentation evidencing proper accounting treatment under SSAP 62. Because Statement of Standard Accounting Practice (SSAP) 62 and Financial Accounting Standards Board (FASB) 113 (related to GAAP and statutory reinsurance accounting and risk transfer) did not apply until 1994, the NAIC recognizes that risk transfer 40-24
2.
40.04[5]
analysis may not have been memorialized contemporaneously. In terms of which contracts have reasonably self-evident risk transfer, the ceding company may want to look back to the Interrogatories. Certainly, any contract reportable under the conditions delineated will be subject to this prong of the attestation. Companies will want to obtain guidance from counsel and auditors as to what constitutes sufficient risk transfer analysis in todays environment. 3. The reporting entity complies with all requirements of SSAP 62. This deceptively simple sounding prong will require the careful exercise of due diligence. Each company will determine, perhaps based on consultation with accountants, lawyers and independent auditors, what constitutes sufficient due diligence to establish compliance with all of the risk transfer and accounting requirements of SSAP 62. The reporting entity has appropriate controls in place to monitor the use of reinsurance and adhere to the provisions of SSAP 62. This prong is the key to the ability to make the CEO/CFO attestations on an ongoing basis. Some companies will have sufficient controls already in place; others will need to develop such controls and put them in place as soon as possible.
4.
40.04[5] Fronting Arrangements. There is not a general agreement in
the reinsurance industry as to how fronting is dened, and there are varying perceptions of whether the general duties and relationships between cedent and reinsurer change in the context of a fronting arrangement. At a minimum, fronting involves the reinsurance of all or substantially all of a book of business. The ceding company retains little or no net liability on the ceded business and receives a fee (through the ceding commission and perhaps other forms of compensation such as service fees) in exchange for allowing the business to be written on its paper. Sometimes, the goal of a fronted arrangement is to have the insurance that is sought to be brought to the marketplace sold through the auspices of an admitted carrier, even though the real party in interest with underwriting expertise and per the reinsurance contract nancial exposure vis-a-vis the cedent/ front is the reinsurer. In many fronting arrangements, a managing general agency (MGA) underwrites the business and handles claims on the reinsured policies. There is disagreement as to what extent responsibility for monitoring the MGA and responsibility for the MGAs misdeeds lies with cedent or reinsurer. It is clear, however, 40-25
40.04[5]
that a fronting insurer remains contractually liable to perform with respect to its insureds under the direct policies, whether or not it is indemnied by its reinsurer [Am. Special Risk Ins. Co. v. Delta Am. Re-Insurance Co., 836 F. Supp. 183, 185 (S.D.N.Y. 1993)]. The reinsurer, lacking privity with the direct insured, may be exposed to claims of tortious interference with contract or for prospective economic advantage if it directs the cedent/front not to pay a valid claim. At the same time, the cedent faces the risk that if it pays the direct claim without the support of its reinsurer a risk that it thought it may be only fronting may remain on its doorstep, for the reinsurer may assert that the payment to the direct insured was never owed in the rst place under the direct insurance policy and thus represents an uncovered, ex gratia or gratuitous payment for which indemnication under the reinsurance arrangement is not owed.
z Strategic Point: The reinsurance contract in a fronting arrange-
ment should optimally specify who is responsible for oversight of the MGA and who is responsible if the MGA breaches its duties.
Consider: Parties should conrm that fronting is allowed in their
jurisdiction, and that there are no specic regulations that are relevant to their arrangements.
z Strategic Point: Fronting arrangements enable reinsurers to
accept 100 percent of the liability in states where they are not licensed to write such business on a direct basis [Reliance Ins. Co. v. Shriver, 224 F.3d 641, 642 (7th Cir. 2000); Union Sav. Am. Life Ins. Co. v. N. Central Life Ins. Co., 813 F. Supp. 481, 484 (S.D. Miss. 1993); Equity Diamond Brokers, Inc. v. Transnational Ins. Co., 785 N.E.2d 816, 818 (Ohio Ct. App. 2003)]. In some instances, fronting allows alien insurers to accept 100 percent of the exposure on risks it is prohibited by regulatory restrictions to write directly [Gallinger v. Vaaler Ins., 12 F.3d 127, 128 n.1 (8th Cir. 1994) (applying North Dakota law)]. It should be noted that fronting can be done as a retrocession also. Fronting allows ceding insurers to receive reinsurance credit that would not be available, at least without security, if the reinsurance was issued directly by an unauthorized reinsurer [see 40.06 below for a discussion of credit for reinsurance]. A licensed reinsurer can front for an unauthorized reinsurer or a reinsurance syndicate, to permit the ceding insurer to take credit for the reinsurance without need for security [Am. Special Risk Ins. Co. v. Delta Am. Re-Insurance Co., 836 F. Supp. 183, 185 (S.D.N.Y. 1993)]. 40-26
Understanding Reinsurance 40.05 Lack of Privity of Contracts.
40.05[1]
40.05[1] Know General Rule. A fundamental principle of reinsurance
is that the reinsurer ordinarily is not liable to the original policyholder of the ceding insurer; it is not a co-signer of the policy issued to the original policyholder, and it is not jointly and severally obligated to make good on the benets the policyholder sought to obtain under the insurance contract sold by the insurer/cedent. Many court decisions have recognized that the reinsurer is in contractual privity only with the ceding company and has no contractual obligation to the original insured, underlying claimants, or any third parties [Barhan v. Ry-Ron, Inc., 121 F.3d 198 (5th Cir. 1997) (applying Texas law); Travelers Cas. & Sur. Co. v. Prudential Reinsurance Corp., 2001 U.S. Dist. LEXIS 10913 (N.D. Ohio 2001), citing Stickel v. Excess Ins. Co. of Am., 23 N.E.2d 839 (Ohio 1939); Prudential Reinsurance Co. v. Superior Court (Garamendi), 842 P.2d 48 (Cal. 1992)]. Moreover, most courts have rejected claims brought by original policyholders against reinsurers based on agency and third-party beneciary theories [Aetna Ins. Co. v. Glens Falls Ins. Co., 453 F.2d 687, 690 (5th Cir. 1972) (applying Georgia law); Reid v. Ruffin, 469 A.2d 1030 (Pa. 1983)].
Exception: While the rule of lack of privity is generally respsected
by the courts, there have been some cases, particularly arising out of the insolvency of the direct insurer/cedent, where a court has characterized the original policyholder as a third-party beneciary of the reinsurance arrangement, thus possessing the rights to enforce a contract to which it is not a party in accordance with the ordinary contract-law rules governing third-party beneciaries. Policyholders may seek to skip over the insurer with which it has privity by arguing that the reinsurer is the alter ego of the insurer, at least insofar as the particular policy or particular insurance program is concerned. For example, in the bankruptcy context, reinsurers were considered to be the true risk bearers where the ceding insurer merely acted as the fronting company, bore no underwriting risk, and left responsibility for claims handling and funding to the reinsurers [Koken v. Legion Ins. Co., 831 A.2d 1196, 1237-38 (Pa. Commw. Ct. 2003)]. In another case, the court found that an insured had third-party beneciary status where the insurer acted as a fronting company and the reinsurers bore all responsibility for underwriting and claims handling and managed the defense of coverage claims [Venetsanos v. Zucker, Facher & Zucker, 638 A.2d 1333, 1339-40 (N.J. Super. Ct. App. Div. 40-27
40.05[2]
1994)]. [See 40.04[5] above for a discussion of fronting arrangements]. However a federal district court in Missouri rejected the theory that a reinsurers conduct in paying claims alone can make the reinsurer liable directly to the original insured [Allendale Mut. Ins. Co. v. Crist, 731 F. Supp. 928, 932-33 (W.D. Mo. 1989)]. Similarly, a federal district court in New Jersey rejected the policyholders assertion that a reinsurers involvement in the adjustment and settlement of claims (as is common where there is a claims-control clause) allowed the court to pierce the alleged reinsurance veil [G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. Dist. LEXIS 19060, at *40-41 (D.N.J. 2007)].
Exception: It may be possible for an insured to bring a direct
action against a reinsurer if the reinsurer allegedly induced the direct insurer to breach the underlying policy by denying the claims in question. For example, a tort claim based on this theory asserted by policyholders against a reinsurer recently survived a motion to dismiss in a federal district court in Florida [Law Offices of David J. Stern v. SCOR Reinsurance Corp., 354 F. Supp. 2d 1338, 1341-42 (S.D. Fla. 2005)].
Cross Reference: For a general discussion of a reinsurers potential liability to the policyholder of the ceding insurer, see Eric Mills Holmes, Appleman on Insurance 2d 106.7. 40.05[2] Consider Cut-Throughs. A signicant exception to the gen-
eral rule that an insured may not seek payment directly from a reinsurer is present where a cut-through endorsement is contained in the original underlying policy. A cut-through provision gives an insured a contractual right to pursue a direct action against the reinsurer; it can be conceived of as an express grant of third-party beneciary status of the putative non-party direct insured. Cutthroughs most often apply only when the direct insurer is insolvent and provide that the loss which the reinsurer would have paid to the estate of the insolvent insurer is instead paid directly to the original policyholder [compare Wilcox v. Anchor Wate, 2006 UT 6]. A cutthrough is similar to an assumption reinsurance arrangement, which effectively is the consensual substitution of the reinsurer for the cedent as the agent for performance, which in turn typically vests in the direct insured the right to pursue either the original direct insurer (with which it has contract privity) or the assumer of the direct insurers liability, at the insureds election. One difference between a cut through and an assumption arrangement, is that cut 40-28
40.05[2]
throughs more often are agreed ex ante, that is, when the policy is placed, and assumptions occur when the cedent effects a lossportfolio transfer to a reinsurer by which the reinsurer steps into its shoes inter sese. The assumption must be an explicit written assumption of liability to the original policyholder who acquires a direct right of action against the reinsurer; note that since the assumption takes place on only one side of the transaction, it is not a novation, freeing the original contracting party from its contractual duties; it is not ctive, however, which is why the direct insured often will be permitted to elect to pursue either the original party in privity or the assumption reinsurer. Many state statutes permit reinsurers to enter into cut-through endorsements. [Cal. Ins. Code 922.2; N.Y. Ins. Code 1308(a)(2)(B); Tex. Ins. Code 493.055]. This right has been recognized by many courts as well [Martin Ins. Agency, Inc. v. Prudential Reinsurance Co., 910 F.2d 252-53 (5th Cir. 1990) (interpreting Louisiana law); Bruckner-Mitchell, Inc. v. Sun Indem. Co., 82 F.2d 434, 444 (D.C. Cir. 1936); Klockner Stadler Hurter, Ltd. v. Ins. Co. of Pennsylvania, 785 F. Supp. 1130, 1134 (S.D.N.Y. 1990)].
Exception: Cut-through endorsements that interfered with admin-
istration of an insolvent insurers estate were found to be unenforceable [Colonial Penn Ins. Co. v. Am. Centennial Ins. Co., 1992 U.S. Dist. LEXIS 17552, at *15-18 (S.D.N.Y. 1992), discussing Foster v. Mutual Fire, Marine & Inland Ins. Co., 531 Pa. 598, 614 (1992)].
t Warning: Cut-through endorsements are unenforceable under
Bermuda law [Dunlop Pneumatic Tire Company Ltd. v. Selfridge & Co. Ltd. [1915] A.C. 847]. Insurers and reinsurers should carefully research the legality and enforceability of cut-through clauses before using them.
Cross Reference: For a discussion of cut-through endorsements
and related contract provisions, see Eric Mills Holmes, Appleman on Insurance 2d 167.2[B][1].
40-29
III.
CONSIDERING REINSURANCE REGULATION.
40.06 Credit for Reinsurance. Credit for reinsurance laws constitute a key
component of the regulation of reinsurance in the United States. These laws determine the circumstances in which a ceding insurer can take nancial statement credit for reinsurance recoverables as an asset and as a reduction of its unearned premium and loss reserves on account of reinsurance ceded. Where an insurer can take credit for reinsurance, it can increase its surplus and thus expand its allowed capacity to write new insurance business. In order to qualify for nancial statement credit, most states require that the reinsurer be licensed or accredited in the same state where the direct insurer does business, or that the reinsurer be domiciled and licensed in a state that employs substantially similar credit for reinsurance standards to those imposed by the direct insurers state of domicile. Most states also allow credit for reinsurance ceded to a nonUnited States reinsurer that maintains a trust fund in the U.S. for the protection of its U.S. ceding insurers. In addition, the reinsurance contract must actually materially transfer risk from the cedent to the reinsurer and include an insolvency clause [see 40.08 below for a discussion of the insolvency clause]. Some states also require that the reinsurer assume all credit risks of any intermediary receiving payments [N.Y. Comp. Codes R. & Regs. tit. 11, 125.6].
Exception: A signicant portion of the reinsurance in the U.S. is ceded
to unlicensed alien reinsurers that are not regulated for solvency in any state. A ceding insurer can still take credit for reinsurance ceded to unlicensed or unaccredited reinsurers if the recoverables are adequately collateralized. This requirement is satised if the reinsurer maintains certain trust deposits for the protection of all of its U.S. cedents. Alternatively, the reinsurer can provide individual cedents with collateral. The ceding company can reduce its balance sheet liabilities by an amount equal to the collateralization. Ceding insurers typically secure the payment of reserves on reinsured liabilities (i.e., case reserves, incurred but not reported reserves (IBNR), unearned premium reserve and reserve for allocated loss adjustment expenses (LAE)) by means of a clean letter of credit issued or conrmed by a nancial institution approved by the state insurance commissioner [see 40.06 below for a discussion of letters of credit]. In these circumstances, the reinsurer is the applicant requesting the bank to issue the letter of credit in favor of the beneciary, the ceding insurer. Trust funds, reinsurer funds held by the cedent as security (funds withheld) or other approved mechanisms also may be viewed as 40-30
40.06
collateral sufficient to permit credit for reinsurance [N.Y. Comp. Codes R. & Regs. tit. 11, 126.3]. Many of these rules, however, are currently under review by the National Association of Insurance Commissioners (NAIC) and the federal government.
Example: The NAIC develops model laws, regulations and nancial
statements in order to achieve substantial similarity of state laws and procedures in key areas of solvency, including credit for reinsurance. The NAIC has issued a recommended credit for reinsurance model law and regulation, some variation of which has been promulgated by every state [Model Law on Credit for Reinsurance (2003) and Model Regulation on Credit for Reinsurance reprinted in Eric Mills Holmes, Appleman on Insurance 2d].
Example: The State of California recently adopted a comprehensive set
of regulations, referred to as the Reinsurance Oversight Regulations, which cover the following three general topics: (1) the ceding companys accounting for reinsurance on its nancial statements; (2) requirements applicable to the form and content of reinsurance agreements; and (3) oversight of reinsurance transactions and related sanctions. The requirements are intended to elicit from insurers a true exhibit of their nancial condition and to safeguard the solvency of licensees and apply to all insurers licensed or accredited in California, all approved U.S. trusts of otherwise unauthorized reinsurers and licensed reinsurance intermediaries. In addition, reinsurers that are not licensed in California but assume risks from California domestic and foreign insurers may also be affected by changes in the regulations with respect to approved forms of security securing reinsurance obligations. The regulations contain detailed requirements for licensed insurers intending to receive credit for reinsurance on their nancial statements, requirements for risk transfer and requisites for reinsurance arrangements, including, specically:
Credit for reinsurance ceded to admitted insurers and accredited reinsurers; Credit for reinsurance secured by an approved U.S. trust; Credit for reinsurance required by law; Credit for reinsurance secured by a single beneciary trust, a letter of credit, or funds withheld; Credit for reinsurance of foreign insurers; Transfer of risk for both life and disability and property and casualty business; 40-31
40.07
Contract requirements for statement credit; and Requirements regarding the form of reinsurance arrangements [Cal. Code Regs. tit. 10, 2303-2303.25].
Example: New York similarly provides credit for reinsurance as
follows:
1301. Admitted assets (a) In determining the nancial condition of a domestic or foreign insurer or the United States branch of an alien insurer for the purposes of this chapter, there may be allowed as admitted assets of such insurer, unless otherwise specically provided in this chapter, only the following assets owned by such insurer:
(14) Reinsurance recoverable by a ceding insurer: (i) from an insurer authorized to transact such business in this state, except from a captive insurance company licensed pursuant to the provisions of article seventy of this chapter, in the full amount thereof; (ii) from an accredited reinsurer . . . to the extent allowed by the superintendent on the basis of the insurers compliance with the conditions of any applicable regulation; or (iii) from an insurer not so authorized or accredited or from a captive insurance company licensed pursuant to the provisions of article seventy of this chapter, in an amount not exceeding the liabilities carried by the ceding insurer for amounts withheld under a reinsurance treaty with such unauthorized insurer or captive insurance company licensed pursuant to the provisions of article seventy of this chapter as security for the payment of obligations thereunder if such funds are held subject to withdrawal by, and under the control of, the ceding insurer [N.Y. Ins. Law 1301]. Cross Reference: For an example of an unauthorized reinsurance clause applying to reinsurance ceded to an unauthorized reinsurer, see 40.33 below. 40.07 Letters of Credit. Sometimes, reinsurance contracts require licensed
reinsurers to post letters of credit. However, letters of credit are more commonly obtained by ceding companies which place reinsurance with non-admitted reinsurers and wish to take credit for reinsurance on their nancial statements [see 40.06 above for a discussion of letters of credit as security under credit for reinsurance laws]. The Asset or Reduction from Liability section of the NAICs Model Law on Credit for Reinsurance, adopted in the same or an equivalent form by most states, sets forth the requirements for collateralization of recoverables from non-admitted reinsurers. The NAIC provision stipulates that letters of credit securing the 40-32
40.08
payment of reinsurance obligations must be issued or conrmed by a qualied U.S. nancial institution and be clean, irrevocable, unconditional and evergreen, requiring the nancial institution to provide notice prior to expiration [Model Law on Credit for Reinsurance, Section 23 (2003)]. The NAIC Model Letter of Credit regulations further provide that letters of credit must not be subject to side agreements and must stipulate that the beneciary need only draw a sight draft under the letter of credit and present it to obtain funds and need not present any other document [Credit for Reinsurance Model Regulation, Section 11A (July 2003)].
z Strategic Point Cedent: Ceding insurers should make sure that
letters of credit comply with statutory requirements so they can properly take credit for reinsurance.
Example: Regulation 133 issued by the New York State Insurance
Department sets forth conditions for letters of credit which may be treated as an asset by a ceding insurer. Among other things, an acceptable letter of credit must: be irrevocable; be clean and unconditional; be issued, presentable and payable at an office of the qualied bank in the U.S.; contain a statement that identies the beneciary; contain a statement that it is not subject to any agreement, condition or qualication outside of the letter of credit; contain a statement to the effect that the obligation of the issuing bank under the letter of credit is an individual obligation of such bank and is in no way contingent upon reimbursement with respect thereto; contain an issue date and a date of expiration; have a term of at least one year and contain an evergreen clause which provides at least 30 days written notice to the beneciary prior to expiry date for nonrenewal; and state that it is subject to and governed by New York law [N.Y. Comp. Codes R. & Regs. tit. 11, 79.2].
40.08 Insolvency Clause. In most states, a rehabilitator or liquidator under
the direction of the domiciliary states insurance department takes control of an insurance company that is determined to be insolvent. Although reinsurance agreements are indemnity contracts, they usually include an insolvency clause which alters the indemnity nature of the contract when the ceding insurer becomes insolvent. The insolvency clause permits a liquidator to collect from the reinsurer the amount of reinsurance proceeds that would have become due if the ceding insurer had not become insolvent, even if the cedent has not paid its original policyholders. The liquidator of the estate assumes the insurers rights and obligations under the reinsurance agreement, including the reporting, settlement and de40-33
40.08
fense of claims, and can promptly discharge the insolvent insurers obligations to claimants. Most states have encouraged the inclusion of insolvency clauses by enacting legislation providing that the original insurer may not take credit for reinsurance on its nancial statement unless the reinsurance contract contains an insolvency provision [Cal. Ins. Code 922.2; N.Y. Ins. Law 1308[a][2]; Mass. Ann. Laws ch. 175, 20A]. This is a signicant incentive, as one of the primary reasons for obtaining reinsurance is defeated if the cedent is forced to maintain reserves for the full amount of reinsurance ceded [see 40.06 above which discusses the advantages of obtaining credit for reinsurance]. As a result, these statutes have had the effect of ensuring that virtually all reinsurance agreements issued to U.S. cedents include an insolvency clause.
z Strategic Point Cedents: Cedents should ensure that the insol-
vency clause meets the requirements of the insurance department of their domiciliary state. There are generally ve key provisions included in the insolvency clause: (1) there is no diminution of the claims paid by virtue of the cedents insolvency; (2) the liquidator must provide notice of the pendency of a claim; (3) the reinsurer has the right to investigate and defend claims; (4) the expenses incurred by the reinsurer in defense of claims may be reimbursable; and (5) the reinsurance proceeds are payable to the liquidator with statutory exceptions (i.e. cut-throughs) [Robert C. Reinarz, et al., Reinsurance Practices, Vol. I, 67-68 (1st ed. 1990)].
Cross Reference: For an example of a standard insolvency clause, see Business Insurance Law and Practice Guide 14.08[3]; see also 40.34 below. z Strategic Point Reinsurer: There can be a tension between the
liquidators interests and those of the insolvent companys reinsurers; if the liquidator agrees to pay a direct insurance claim, it can collect reinsurance on the claim even if the estate does not have sufficient assets to pay the claim, in whole or in part [see Robert W. Hammesfahr and Scott W. Wright, The Law of Reinsurance Claims 254 (1992)]. Therefore, reinsurers often monitor liquidators to ensure that they handle claims properly until a full settlement is concluded. Many state statutes provide that the insolvency clause may permit the reinsurer to investigate claims against the insolvent ceding company and interpose any defense or defenses which it may deem to be available to the ceding company or its liquidator, receiver or statutory successor in the proceeding where the claim is adjudicated [N.Y. Ins. Law 1308(a)(3); 40-34
40.08
Cal. Ins. Code 922.2(a)(2)]. Reinsurers should ensure that their insolvency clauses include this wording.
z Strategic Point Reinsurer: Many reinsurance contracts include an
offset clause providing for net accounting between the parties [see 40.35 for an example of a typical offset clause]. In addition, a reinsurer may have a statutory or common law right of set-off (or offset) against amounts owed to an insolvent insurers estate for any amounts that the insolvent insurer owed to the reinsurer. In the event of the cedents insolvency, an offset clause protects the reinsurer by allowing it to reduce the sum that would otherwise be payable to the insolvent estate by the amount it is owed. In the absence of a right of offset, the reinsurer would be forced to pay claims in full, and it would possess an independent claim for any premiums or other sums owed by the cedent (which might be paid at only a fraction of the amount due given that the cedent is insolvent). Several state insurance statutes expressly permit set-offs when the insolvent insurer owed the debt before the date of liquidation and the debts and credits are considered mutual [Cal. Ins. Code 1031; Fla. Stat. Ann. 631.281; N.Y. Ins. Law 7427]. Several courts have held that inclusion of a statutory insolvency clause in the reinsurance contract does not destroy the reinsurers right to set-off [Commr of Ins. v. Munich Am. Reinsurance Co., 706 N.E.2d 694, 697 (Mass. 1999); Prudential Reinsurance Co. v. Superior Court, 842 P.2d 48, 63-64 (Cal. 1992); In re Midland Insurance Co., 590 N.E.2d 1186, 1192 (N.Y. 1992)]. However, at least one court has found that the insolvency clauses directive that reinsurance be payable without diminution due to the insolvency of the ceding insurer abrogates the reinsurers right to offset unpaid premiums from sums due under the insurers policies [Bluewater Ins., Ltd. v. Balzano, 823 P.2d 1365, 1371-74 (Colo. 1992)]. Another court has determined that allowing a reinsurer to set-off unpaid premiums against sums owed the insolvent insurer under the reinsurance agreement would conict with the priority of claims established by state statute and thus, in effect, is a disguished preference in favor of one creditor (the reinsurer) [Allendale Mut. Ins. Co. v. Melahn, 773 F. Supp. 1283, 1287-88 (W.D. Mo. 1991) (applying Missouri law)].
t Warning: Reinsurers of insolvent companies must take care to pay claims to the appropriate party; they are generally obligated to pay the liquidator administering the insolvent companys estate, who is deemed the statutory successor to the insolvent insurer [Martin Ins. Agency, Inc. v. Prudential Reinsurance Co., 910 F.2d 249 (5th Cir. 1990) (applying Missouri law); Excess & Cas. Reinsurance Assn v. Ins.
40-35
40.08
Commr of Cal., 656 F.2d 491 (9th Cir. 1982) (applying California law); Skandia Am. Reinsurance Corp. v. Schneck, 441 F. Supp. 715 (S.D.N.Y. 1977) (applying New York law)].
Exception: A signicant exception to the general rule that the reinsurer
must pay an insolvent cedents liquidator occurs when the reinsurance contract contains a cut-through endorsement, [see 40.05[2] above for a discussion of the operation of cut-throughs].
40-36
IV.
CONSIDERING INSURERS OBLIGATIONS TO REINSURERS IN CASE OF CLAIM.
40.09 Consider Insurers Notice Obligations. 40.09[1] Know What Notice Clause Requires. Most reinsurance con-
tracts include a provision requiring the ceding insurer to notify the reinsurer of losses or claims that may require the reinsurer to indemnify the cedent. Notice provisions typically include information sufficient to: 1. 2. 3. Apprise the reinsurer of potential liabilities to enable it to set reserves; Enable the reinsurer to associate in the defense and control of underlying claims; and Assist the reinsurer in determining whether and at what price to renew reinsurance coverage [Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049, 1065 (2d Cir. 1993), rehg denied, 4 Mealeys Reins. Rep., No. 15, at 7 (1993), affd in part and revd in part, 762 F. Supp. 566 (S.D.N.Y. 1991)].
Consider: As a practical matter, the cedent should be mindful of
the need of the reinsurer to provide notice in turn to its retrocessionaires. Notice requirements may differ with respect to proportional and non-proportional reinsurance. Proportional contracts sometimes do not require individual notice of losses, but instead obligate the ceding insurer to report losses paid and premiums received on a quarterly or monthly basis, so that accounts between the parties can be settled. Non-proportional contracts generally include wording requiring timely notice of individual claims. The wording used to convey this requirement varies but usually conveys the need to give notice promptly, immediately or as soon as reasonably possible or practicable. In many reinsurance disputes, industry custom and practice are often reviewed to determine whether notice was timely. Ceding insurers should establish standards and procedures to ensure that notice is given to reinsurers in a timely fashion. Notice clauses also incorporate varying standards for the event or occurrence which triggers the requirement to give notice of a loss or claim. Some of the wording frequently used is as follows:
any event or development which, in the judgment of the 40-37
40.09[2]
reinsured, might result in a claim . . . hereunder any occurrence or accident which appears likely to involve this reinsurance any accident in which the reinsurance is or may probably be involved all losses which, in the opinion of the Company, may result in a claim hereunder any occurrence likely to give rise to a claim hereunder; and in the event of an accident, disaster, casualty or occurrence occurring which either results in or appears to be of a serious nature as probably to result in a loss involving this Agreement. Other notice clauses include specic or objective standards mandating notice, such as when the cedents reserve exceeds a certain percentage or when particular types of injuries occur. Some notice clauses require the cedent to inform the reinsurer of signicant developments that arise after initial notice of a claim has been provided. [For an example of a notice clause requiring notice of subsequent developments, see 40.36 below.] The notice clause sometimes is part of a reports and remittances clause or is included in the conditions section of the reinsurance contract (though the obligation to provide notice may be considered to be a covenant rather than a genuine condition of the reinsurers performance).
Cross Reference: One of the primary purposes of the notice clause is to permit reinsurers to determine whether it is necessary to take action to protect their interests. Many reinsurance contracts include wording permitting the reinsurer to associate in the defense of a claim. The claims cooperation wording can be included in the notice clause or as a separate provision [see 40.11 below for a discussion of claims control and right to associate clauses; see 40.37 below for an example of a notice clause incorporating the right to associate with the ceding insurer in the defense of claims]. Cross Reference: For a discussion of the notice requirement in reinsurance agreements covering environmental business, see Mitchell L. Lathrop, Insurance Coverage for Environmental Claims, 10.06[1]. 40.09[2] Reinsurers Assertion of Late Notice As Defense to Payment of Its Reinsurance Obligations.
40-38
40.09[2][b]
40.09[2][a] Jurisdictions Requiring Proof of Prejudice. Most courts
have held that a reinsurer may refuse to perform on the basis of late notice only if it shows that it was prejudiced by late notice of a claim [British Ins. Co. of Cayman v. Safety Natl Cas., 335 F.3d 205, 207 (3d Cir. 2003) (interpreting New Jersey law); Zenith Ins. Co. v. Employers Ins. Co. of Wausau, 141 F.3d 300, 307 (7th Cir. 1998) (applying Wisconsin law); Ins. Co. of Pa. v. Associated Intl Ins. Co., 922 F.2d 516, 523-24 (9th Cir. 1991) (applying California law)]. The particular nuances of late-notice law varies from state to state. In North Carolina, for example, the reinsurer is required to prove prejudice only if the cedent rst has demonstrated that its failure to give notice was in good faith [Fortress Re, Inc. v. Central Natl Ins. Co. of Omaha, 766 F.2d 163, 165-67 (4th Cir. 1985) (applying North Carolina law)]. In Pennsylvania, the reinsurer must show that it was unduly prejudiced by untimely notice of loss [Life & Health Ins. Co. of Am. v. Fed. Ins. Co. & Great Natl Ins. Co., 1993 U.S. Dist. LEXIS 12165, at *4 (E.D. Pa. 1993) (applying Pennsylvania law)]. In Connecticut, the cedent has the burden of showing that the reinsurer suffered no prejudice [Travelers Ins. v. Central Natl Ins. Co. of Omaha, 733 F. Supp. 522, 528 (D. Conn. 1990) (applying Connecticut law)].
Exception: In some jurisdictions, late notice may entitle the
reinsurer to relief without a showing of prejudice if the cedent acted in bad faith, i.e., was grossly negligent or reckless in failing to provide notice [Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1069-70 (2d Cir. 1993) (applying New York law); Fortress Re Inc. v. Central Natl Ins. Co., 766 F.2d 163, 165-66 (4th Cir. 1985) (applying North Carolina law); Certain Underwriters at Lloyds London v. Home Ins. Co., 783 A.2d 238, 240 (N.H. 2001)].
z Strategic Point Cedent: In some jurisdictions, a reinsurer
may waive its defense of late notice if it fails to object promptly and specically [Cal. Ins. Code 554; Natl Am. Ins. Co. v. Certain Underwriters at Lloyds London, 93 F.3d 529, 538 (9th Cir. 1996); Michigan Twp. Participating Plan v. Fed. Ins. Co., 292 N.W.2d 760, 767 (Mich. Ct. App. 1999)].
40.09[2][b] Jurisdictions Recognizing Late Notice As Defense Regardless of Ability to Prove Prejudice. Some courts have determined
that breach of a notice provision is a complete bar to recovery, without a showing of prejudice [Liberty Mut. Ins. Co. v. Gibbs, 773 40-39
40.10[1]
F.2d 15, 18-19 (1st Cir. 1985) (applying Massachusetts law); Allstate Ins. Co. v. Employers Reinsurance Corp., 441 F. Supp. 2d 865, 875 (N.D. Ill. 2005), citing INA Ins. Co. of Ill. v. City of Chi., 379 N.E.2d 34, 36 (Ill. App. Ct. 1978) (applying Illinois law); Highlands Ins. Co. v. Employers Surplus Lines Ins. Co., 497 F. Supp. 169, 171-73 (E.D. La. 1980) (applying Texas law)]. These cases thus construe the notice provision as a condition precedent to performance.
Exception: The Ninth Circuit has stated that, even where notice
is denominated a condition precedent, the reinsurer still must demonstrate prejudice to be relieved of liability [Natl Am. Ins. Co. v. Certain Underwriters at Lloyds London, 93 F.3d 529, 539 (9th Cir. 1996) (applying California law)].
Cross Reference: For a discussion of reinsurance cases considering late notice defenses and what constitutes prejudice to a reinsurer from late notice, see Eric Mills Holmes, Appleman on Insurance 2d 105.7. 40.10 Consider Reinsurers Right to Access Insurers Records. 40.10[1] Consider What Access to Records Clause Requires to Be Made Available to Reinsurer. Most reinsurance contracts include a provision
granting the reinsurer the right to inspect or audit the ceding insurers books and records. This clause might be called Access to Records, Inspection of Records or simply Audit. The right to audit or inspect is important to the reinsurer, as the nature of reinsurance dictates that the cedent maintain all of the information about the business written and the claims made. The inspection clause allows the reinsurer to evaluate the performance of the reinsurance contract, specically, what business the reinsured is underwriting, how it is handling claims and whether they are covered by the reinsurance agreement. Access to documents enables the reinsurer to determine whether the cedent acted reasonably and in good faith in handling underlying claims and in settling and ceding claims to the reinsurer. Some inspection clauses provide access to claims les only. Reinsurers may choose to inspect cedents records on a regular basis. Requests for inspections or audits also may arise in the following circumstances: in preparation for the annual renewal of a reinsurance contract; when there is a change in the loss reporting pattern; when the cedent has not provided sufficient information in presenting losses; when there is a marked change in premium volume; or when 40-40
40.10[1]
there is another unusual event regarding either the claims or underwriting/premium activity. Reinsurers also often seek audits or inspection when cedents enter run-off or exit certain business sectors. The right of inspection is as broad or narrow as the particular contract wording provides. A typical inspection or audit clause denes broadly the records to which the reinsurer is entitled; clauses enabling the reinsurer to review all documents referring to the business under the reinsurance agreement or any records relating to this reinsurance or claims in connection therewith are common. Access often is provided to the reinsurer and its authorized representatives, allowing the use of consultants to conduct inspections. Use of consultants to assist in audits has become increasingly common as the magnitude and complexity of claims, especially in long-tail casualty lines, have caused reinsurers to engage independent auditors or consultants to perform records inspections. Access usually is permitted at all reasonable times and is typically provided where the records are normally kept. Documents typically requested by reinsurers during claims inspections include the following: 1. 2. 3. 4. The claims register; Claims bordereaux (i.e., summaries); Selected underlying claims les; and Inspection reports on claims handling facilities.
Documents typically sought during underwriting and nancial audits or inspections include the following: 1. Basic underwriting information for the direct insurance, including the name of the insured, insureds location, policy number and period, limits of liability, name of underwriter and underwriting analysis, broker, type of coverage and policy provisions; Premium information; Documentation regarding brokers, third-party administrators and delegations of underwriting authority; Reinsurance contract wording, underwriting guidelines, evaluation of risks, negotiation les; and Accounting les showing cessions of premiums and losses. 40-41
2. 3. 4. 5.
A frequent inspection-related issue is the impasse that occurs when a
40.10[1]
reinsurers claim payments are delinquent and it has demanded an audit to verify the claims validity. The cedent may then refuse to allow the audit until the claims are paid; as a result, each party claims the other has breached the contract and thus the obligation to perform is suspended until the prior breach is remedied. Arbitration panels usually elide this dilemma by ordering an inspection or audit as a part of discovery. In one case, a court ordered a reinsurer to make its payments current, despite the reinsurers complaint that the cedent had refused it access to records regarding one of the treaties at issue. The court found the cedents insistence that payment be current before access to records was permitted to be commercially reasonable given the reinsurers failure to object to the cedents statement of account or pay them. The reinsurer was ordered to prove the sort of mistakes cognizable in law to support an adjustment of the stated account or to pay the claim [Am. Home Assurance Co. v. Instituto Nacional de Reaseguros, 1991 U.S. Dist. LEXIS 501, at *11 (S.D.N.Y. 1991)]. This decision may be limited by the specic facts of this reinsurance relationship.
Cross Reference: For an example of a typical access to records clause in a reinsurance agreement, see 40.39 below. Cross Reference: For additional examples of inspection clauses, see Eric Mills Holmes, Appleman on Insurance 2d 106.4[A]. z Strategic Point Reinsurer: Reinsurance agreements should be
drafted with an Access to Records clause allowing the reinsurer the right to examine the books and records of the ceding insurer that relate to the reinsurance. The clause should include the following provisions: 1. The reinsurer has the right to inspect all books and documents relating to business ceded to the reinsurer under the reinsurance agreement; The right of inspection survives contract termination; The inspection right vests in the reinsurer or in any of its authorized representatives; and Access for inspection will be allowed at all reasonable times.
2. 3. 4.
Exception: A federal court affirmed an arbitration panels nding
that, even in the absence of an audit or inspection clause, the cedent is obligated to furnish information reasonably requested 40-42
40.10[1]
by the reinsurer. The panel had denied recovery to the cedent after it failed to support its reinsurance claim with sufficient information [Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832 (9th Cir. 1995)]. At least one commentator has expressed the view that access to records is so vital to the reinsurance relationship that it constitutes an implied right of the reinsurer in the absence of express wording [Robert W. Hammesfahr & Scott W. Wright, The Law of Reinsurance Claims 6.4 (1994)].
t Warning: A reinsurers failure to exercise the right of inspection
may have a negative impact in a later dispute with its cedent. One court found a reinsurers fraudulent concealment claim untenable in the light of the reinsurance contracts inclusion of a typical access to records clause. The court explained that the absence of any indication that the cedent failed to honor the access to records provision defeated the fraudulent concealment claim [Gerling Global Reinsurance Corp. v. Safety Mut. Cas. Corp., 1981 U.S. Dist. LEXIS 13864, at * 7 (S.D.N.Y. Aug. 7, 1981)].
z Strategic Point Cedent: To the extent possible, cedents should
develop a policy regarding the privileged information they will or will not disclose to their reinsurers. Some courts have found that coverage opinions prepared by cedents counsel and other privileged materials that are shared with reinsurers lose their privileged status and therefore must be disclosed to policyholders in direct insurance coverage litigation (at least where there is a conict between the cedent and the reinsurer) [see 40.10[2] below discussing the cedents dilemma in providing privileged documents to its reinsurer].
Consider: While reinsurers can enforce the right to inspection
through arbitration or, if the contract does not include an arbitration clause, through a lawsuit, at least one court has held that allowing the reinsurer to inspect is not a condition precedent to the right to arbitrate. The court granted the cedents petition to compel arbitration despite its refusal to allow the reinsurer access to its records [Phila. Reinsurance Corp. v. Universale Ruckversicherungs A.G., 1994 U.S. Dist. LEXIS 56, at *1 (S.D.N.Y. Jan. 5, 1994)].
Cross Reference: The inspection and audit provision is often
included within the claims cooperation clause of the reinsurance contract. For a discussion of claims cooperation or control (and 40-43
40.10[2][a]
right to associate) clauses in reinsurance contracts, see 40.11 below.

Consider: Cedents often ask reinsurers to sign condentiality
agreements before permitting access to records. While there do not appear to be any published decisions on this issue, it is likely that courts or arbitration panels would permit cedents to condition inspections in this manner. Arbitrators have demonstrated a general trend towards imposing condentiality on the parties beyond that strictly provided in the reinsurance contract. For example, arbitrators may order the parties to treat the entire arbitration process, not just the outcome, as condential. A reinsurer that objects to executing a reasonable condentiality agreement pertaining to the inspection of records may risk alienating the adjudicators.
Cross Reference: See 40.10[2][f] below for a discussion of the
use of condentiality agreements to protect a cedents privileged documents.

Cross Reference: For an example of a clause requiring condentiality that can be added to or used in conjunction with an access to records provision, see 40.40 below. 40.10[2] Consider Whether Insurers Disclosure of Privileged Documents to Its Reinsurer Constitutes Waiver As to Third Parties, Including Its Insureds. 40.10[2][a] Common Interest Doctrine. There is no cedent-reinsurer
privilege, so whether the disclosure of otherwise privileged materials from one party to the other waives the privilege is determined by ordinary principles of privilege law, considered in the light of the nature of the relationship between the parties and the circumstances that exist at the time of disclosure. Thus, a cedent will be able to disclose its privileged communications to a reinsurer without waiving the right to assert its privilege as to other parties (including its insureds), depending on the nature of the cedent/ reinsurer relationship, specically, whether the cedent and reinsurer had a common interest when the disclosure was made. (The question of nonwaiver of privilege is separate from the question whether the cedent is required to share privileged communications with the reinsurer.) The common interest doctrine is an exception to the general rule that disclosure of a privileged communication to a third party who is not an agent or employee of 40-44
40.10[2][b]
counsel waives any privilege that otherwise would apply to the communication. It is most often used as a shield, enabling parties with a common interest to share privileged information without waiving privilege against a third party. The common interest doctrine is most commonly recognized when multiple parties are represented by the same attorney. Communications made to the shared attorney to establish a litigation strategy are privileged as against all others, although not privileged inter sese [N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 366 (D.N.J. 1992), affd in part and revd in part on other grounds, N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995)]. The doctrine has been extended to situations where the parties are represented by separate counsel but are engaged in a common legal enterprise or share an identical legal interest with respect to the subject matter of a communication between an attorney and client pertaining to legal advice. The doctrine is not applicable, however, when the parties shared interests are only commercial [Blanchard v. Edgemark Fin. Corp., 192 F.R.D. 233, 237 (N.D. Ill. 2000); Aetna Cas. & Sur. Co. v. Certain Underwriters at Lloyds London, 676 N.Y.S.2d 727, 731-34 (N.Y. Sup. Ct. 1998)].
40.10[2][b] Disclosure Made Prior To Insurance Coverage Litigation.
Cedents and reinsurers that have shared privileged materials sometimes argue that their common interest in the outcome of a coverage claim should avoid a waiver of the privilege as against the insured. Where coverage opinions and other privileged materials are generated prior to a reservation of rights or denial of claim by the insurer or in the absence of the anticipation of a direct coverage dispute, courts often reject assertion of the common interest doctrine and nd a waiver of privilege when the cedent has disclosed the materials to its reinsurer. The rationale for this result is in part that the motivation of the cedent to provide the coverage opinion is to induce the reinsurer to perform under its contract rather than to coordinate common legal strategy.
Example: A court found that coverage opinions disclosed by a
cedent to its reinsurer were not protected by the attorney-client privilege or the work product doctrine but that even if they had been privileged, the common interest doctrine did not apply because: (i) there was no evidence that the documents were disclosed in anticipation of litigation; (ii) any common interest was commercial and not legal; and (iii) the disclosures were made in the ordinary course of business [Allendale Mut. Ins. 40-45
40.10[2][b]
Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 141 (N.D. Ill. 1993)].
Example: In a case involving a cedents demand for discovery
from a group of reinsurers, a court refused to nd a common legal interest among the reinsurers sufficient to avoid waiver of attorney-client privilege, where the parties were not in litigation and the reinsurers common interests were purely commercial [Aetna Cas. & Sur. Co. v. Certain Underwriters at Lloyds London, 676 N.Y.S.2d 727, 731-34 (N.Y. Sup. Ct. 1998)].
Example: Even where a reinsurer had anticipated that coverage litigation would arise from a large policyholder claim, the court refused to recognize a common interest between the ceding insurer and the reinsurer and found that the attorney-client privilege had been waived by the disclosure of documents [Am. Prot. Ins. Co. v. MGM Grand Hotel Las Vegas, 1983 U.S. Dist. LEXIS 16423, at *15 (D. Nev. June 9, 1983)]. Example: A cedents production of documents to its reinsurer waived any applicable privileges as the relationship between insurer and reinsurer is simply not sufficient to invoke the common interest doctrine [McLean v. Contl Cas. Co., 1996 U.S. Dist. LEXIS 17503, at *2 (S.D.N.Y. 1996)]. Exception: A court refused to nd waiver of privilege based on
the reinsurers need to review the cedents documents to determine the extent of its reinsurance exposure [Great Am. Surplus Lines Ins. Co. v. Ace Oil Co., 120 F.R.D. 533, 538-39 (E.D. Cal. 1988)].
z Strategic Point Reinsurer: It is in both the cedents and the
reinsurers best interests to minimize the risk that a policyholder might gain access to privileged information, especially that which reveals the strategies and thought processes of the cedent and its counsel in evaluating and litigating a policyholders claim. Thus, the reinsurers requests for privileged information from a cedent should be made carefully, regardless of whether the reinsurer believes it is entitled to the information or whether the cedent has customarily provided it.
z Strategic Point Cedent: Given the inconsistent views of
courts considering the applicability of the common interest doctrine, a cedent that discloses privileged communications to a reinsurer risks a later nding that it has waived its privileges. 40-46
40.10[2][b]
The outcome of a privilege dispute also may depend on the particular jurisdiction or the forum within the jurisdiction at the time of disclosure. Cedents that wish to avoid waiver of privilege as against their policyholders by disclosing privileged materials to their reinsurers may consider taking the following measures (which may or may not be successful): 1. Try to establish the foundation for assertion of the common interest doctrine by expressly stating in the reinsurance contract that the parties share a common interest and do not intend the sharing of privileged documents to waive any applicable privileges or protections. Consider whether disclosure of privileged information to the reinsurer is really necessary. For example, the facts necessary for a reinsurer to evaluate a settlement can be provided through means other than the disclosure of privileged materials; If disclosure must occur, enter into a condentiality or common interest agreement that acknowledges a common interest between the cedent and reinsurer, restricts further disclosure of the material and endeavors to preserve all applicable privileges or immunities against disclosure [see 40.10[2][f] for a discussion of the use and efficacy of condentiality and common interest agreements]; If litigation or arbitration between the cedent and the reinsurer is already in progress, obtain a protective order that seeks to preserve privileges and immunities against waiver and includes a ruling that the parties have a common interest requiring the cedent to produce the documents. An order nding common interest might bolster the assertion of privilege against a claim of waiver in a subsequent dispute between the cedent and a policyholder.
2.
3.
4.
Cross Reference: For a discussion of cases considering the availability of protection for privileged or condential information provided by a cedent to its reinsurer, see Mitchell L Lathrop, Insurance Coverage for Environmental Claims 10.06[4][c]. z Strategic Point: Cedents and reinsurers invoking the com-
40-47
40.10[2][c]
mon interest doctrine to avoid waiver of privilege as against a policyholder cannot later assert the privilege against each other if their interests become adverse [N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 366 (D.N.J. 1992)]. This can be an advantage or a disadvantage in a subsequent dispute over reinsurance payment, depending on the content of the privileged material.
40.10[2][c] Disclosure Made During Course of Insurance Coverage Litigation. The majority of courts that have addressed the issue
have determined that a cedents disclosure of privileged documents and communications to a reinsurer during the course of insurance coverage litigation does not constitute a waiver of the attorney-client privilege. This determination is based on the theory that the cedent and its reinsurer share a common interest in the outcome of the coverage litigation [Minn. Sch. Bds. Assn Trust v. Employers Ins. Co. of Wausau, 183 F.R.D. 627, 632 (N.D. Ill. 1999); U.S. Fire Ins. Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280, at *6-7 (S.D.N.Y. 1989); Great Am. Surplus Lines Ins. Co. v. Ace Oil Co., 120 F.R.D. 533, 537-38 (E.D. Cal. 1988)]. The fact that the reinsurer is not a party defendant is of little signicance. Some courts have emphasized the cedents obligation to keep its reinsurer apprised of the status of the coverage dispute and the necessity of disclosure particularly where such disclosure is made pursuant to an inspection or cooperation clause. The doctrine was similarly applied to preclude waiver of privilege as against an excess insurer overlying the cedent, where the cedent had disclosed a memorandum to its reinsurer [U.S. Fire Ins. Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280, at *6-8 (S.D.N.Y. 1989)] and as against a reinsurer, where the insurer had disclosed privileged material to another reinsurer [Employer Reinsurance Corp. v. Laurier Indem. Co., 2006 U.S. Dist. LEXIS 10943, at *6 (M.D. Fla. 2006)]. In most circumstances, the involvement of a broker as a conduit for disclosure of privileged information does not by itself effect a waiver [see Minn. Sch. Bds. Assn Ins. Trust v. Employers Ins. Co. of Wausau, 183 F.R.D. 627, 631 (N.D. Ill. 1999); U.S. Fire Insurance Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280, at *4-7 (S.D.N.Y. July 19, 1989); but see U.S. v. Peppers Steel & Alloys, Inc., 1991 U.S. Dist. LEXIS 21563, at *8-10 (S.D. Fla. 1991)].
Exception: A court found that there was no unity of interest protecting from disclosure correspondence between an insurer
40-48
40.10[2][e]
and reinsurer regarding an insureds claim that had ripened into litigation. Although their commercial interests coincided to some extent, the insurer failed to establish that it coordinated legal strategy with its reinsurer [Reliance Ins. Co. v. Am. Lintex Corp., 2001 U.S. Dist. LEXIS 7140, at *10-11 (S.D.N.Y. 2001)].
40.10[2][d] Disclosure Made After Resolution of Insurance Coverage Litigation But Prior to Institution of Arbitration or Litigation Between Cedent And Reinsurer. When a cedent wishes to disclose privileged
information to its reinsurer after settlement or adjudication of an underlying coverage action, but prior to the institution of arbitration or litigation against the reinsurer (perhaps in an effort to persuade the reinsurer of the legitimacy of the ceded losses and to avoid a reinsurance dispute), it is unclear whether the common interest doctrine will apply. At least one court has declared that a cedents disclosure to its reinsurer is not in furtherance of a common interest where disclosed after settlement with the insured but prior to litigation/arbitration between the cedent and reinsurer. As the court explained:
North River and CIGNA had no common legal interest. On the contrary, their interests . . . were antagonistic. In the process of seeking payment from CIGNA under their reinsurance contract, North River provided the [privileged memos], apparently hoping that CIGNA would be persuaded to pay. It was not, and litigation ensued. At no point did North River and CIGNA engage in a common legal enterprise, and the common interest doctrine therefore does not apply [North River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *22-23 (S.D.N.Y. 1995)]. 40.10[2][e] Disclosure Made During Course of Reinsurance Litigation.
When a cedent voluntarily discloses privileged communications to a reinsurer during the course of a dispute involving a claim for reinsurance, it may not have the ability to assert the common interest doctrine to protect against the assertion that the privilege has been waived. A case where a reinsurer attempted to compel production of its cedents privileged documents by arguing that the parties had a common interest sheds some light on the issue. In that case, the court rejected the common interest argument, nding that [t]he interests of the ceding insurer and the reinsurer may be antagonistic in some respects and compatible in others. Thus, a common interest cannot be assumed merely on the basis of the status of the parties [N. River Ins. Co. v. Columbia Cas. Co., No. 90 Civ. 2518 (MLJ), 1995 U.S. Dist. LEXIS 53, at *12 (S.D.N.Y. Jan. 5, 1995)]. The court added: [w]hile their commercial interests coin40-49
40.10[2][f]
cided to some extent, their legal interests sometimes diverge, as demonstrated by the instant litigation. In short [the reinsurers] only argument for nding a common interest is that the two parties stand in the relation of reinsurer to ceding insurer, and that is insufficient [id. at 15].
40.10[2][f] Use of Condentiality and Common Interest Agreements.
A cedent that discloses privileged materials to its reinsurer risks waiving the privilege as against its policyholders, unless it can demonstrate a common interest between the cedent and reinsurer that avoids the waiver [see 40.10[2][b] above discussing application of the common interest doctrine to the reinsurance relationship]. Courts have inconsistently recognized a common interest between cedents and reinsurers, and the outcome of a waiver dispute may depend on the reinsurer/cedent relationship at the time of disclosure. Cedents and reinsurers that wish to avoid a waiver of privilege can execute condentiality or common interest agreements to try to preserve applicable privileges or immunities against disclosure or, more precisely, to indicate the factual circumstances and understandings that exist at the time of disclosure. A demonstration through an agreement that the cedent and reinsurer mutually intended to respect and maintain the condentiality of privileged documents may persuade a court that the privilege and work product protection should be maintained as against a policyholder who is using the fact of disclosure to gain access to documents to which it ordinarily would not be entitled. A condentiality agreement may not, however, provide full protection against a claim for disclosure. Put differently, a condentiality or common interest agreement does not create a privilege; rather, it conrms the underlying circumstances at the time of disclosure so as to conrm the lack of any intention to effect a waiver as against third parties. Thus, a common interest (or joint defense) agreement may provide waiver protection by laying out the bases for the existence of a common interest between the cedent and its reinsurer. This may better the parties position if a waiver claim is later asserted. A well-drafted common interest agreement may convince a court that the parties have carefully considered the waiver issue and intended to protect against further disclosure.
Examples Waiver: A court allowing disclosure despite the
existence of a condentiality agreement reasoned that: [t]he agreement does not alter the objective fact that the condenti40-50
40.10[2][f]
ality has been breached voluntarily . . . The agreement is merely a contract between two parties to refrain from raising the issue of waiver or from otherwise utilizing the information disclosed. Plaintiff has no genuine claim of condentiality to the documents it produced . . . . [Chubb Integrated Sys. Ltd. v. Natl Bank of Wash., 103 F.R.D. 52, 67-68 (D.D.C. 1984)]. Another court, refusing to nd a common interest precluding waiver, explained that: [a] private agreement by the parties to protect communications cannot create a privilege [Aetna Cas. & Sur. Co. v. Certain Underwriters at Lloyds London, 676 N.Y.S.2d 727, 733 (N.Y. Sup. Ct. 1998)].
Examples No waiver: One court found that disclosure to a
party pursuant to a condentiality agreement did not substantially increase the opportunity for an adversary to obtain the document and therefore did not constitute waiver of work product protection, although the court did not determine whether the common interest doctrine actually applied [BASF Aktiengesellschaft v. Reilly Indus., 2004 U.S. Dist. LEXIS 21969, at *13 (S.D. Ind. Oct. 19, 2004)]. Another court similarly found that, while not dispositive, disclosure pursuant to a condentiality agreement militated against a nding of waiver of work product protection [SmithKline Beecham Corp. v. Pentech Pharm., Inc., 2001 U.S. Dist. LEXIS 18281, at *15-16 (N.D. Ill. 2001)]. A court considering the condential exchange of legal advice and information pursuant to a cross-consultation agreement among insurance companies and Lloyds syndicates determined that the parties shared a common interest sufficient to preclude waiver of attorney-client privilege and that it was clear they shared the expectation that their communications would remain condential [Travelers Cas. & Sur. Co. v. Excess Ins. Co., Ltd., 197 F.R.D. 601, 607 (S.D. Ohio 2000)].
z Strategic Point Cedent: A condentiality or common inter-
est agreement may be particularly helpful in maintaining protection under the work product doctrine, which could apply to many of the disclosed documents. While courts have often taken a stricter view of the attorney-client privilege and have been quick to nd a waiver where the condentiality that the privilege protects has been breached, courts applying the work product immunity generally have been more tolerant of disclosure to third parties. The work product immunity will not be deemed waived unless the disclosure is inconsistent 40-51
40.10[3][a]
with maintaining secrecy from possible adversaries [U.S. Fire Ins. Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280, at *7 (S.D.N.Y. July 20, 1989) (citation omitted); Mitchell L. Lathrop, Insurance Coverage for Environmental Claims 25.04]. The analysis should focus on whether the disclosures in issue increased the likelihood that a current or potential opponent in litigation would gain access to the disputed documents [In re Imperial Corp. of Am. v. Shields, 167 F.R.D. 447, 454 (S.D. Cal. 1995), affd on subsequent appeal, 92 F.3d 1503 (9th Cir. 1996)]. In some circumstances, a cedent should be able to argue that disclosure of work product material to a reinsurer under the auspices of a condentiality agreement has not increased the likelihood that a current or potential opponent in litigation (i.e., a policyholder) would gain access to the disputed documents.
40.10[3] Consider Reinsurers Ability to Compel Production of Cedents Privileged Documents. 40.10[3][a] Consider Whether Inclusion of Access to Records Clause Constitutes Waiver. In some circumstances, a ceding insurer may
wish to withhold privileged documents from a reinsurer, perhaps to avoid a potential waiver of privilege which would obligate the cedent to provide the documents to its insured. A frequently raised issue is the extent to which access-to-records clauses allow reinsurers to compel production of documents contained in the cedents les that are subject to attorney-client privilege or work product protection. Several types of documents in a ceding insurers les could be subject to privilege or immunity as against the reinsurer, including: 1. 2. 3. 4. Claims counsel reports regarding the defense of policyholders; Expert reports or analyses of a claim by the insurers or insureds personnel concerning the defense of a claim; Coverage analyses by the cedents in-house or outside counsel; and Draft pleadings and communications with counsel regarding those pleadings.
Nevertheless, reinsurers may have a legitimate interest in reviewing such documents. However, the courts that have addressed the interplay between the contractual obligation to permit inspection 40-52
40.10[3][b]
and claims of privilege or work product protection have found that the mere inclusion of access to records and cooperation clauses in reinsurance contracts do waive the cedents privilege as against the reinsurer [N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 369 (D.N.J. 1992), affd in part and revd in part on other grounds, N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995); Gulf Ins. Co. v. Transatlantic Reinsurance Co., 788 N.Y.S.2d 44, 45-46 (N.Y. App. Div. 2004)]. As one court explained: Although a reinsured may contractually be bound to provide its reinsurer with all documents or information in its possession that may be relevant to the underlying claim adjustment and coverage determination, absent more explicit language, it does not through a cooperation [or inspection] clause give up wholesale its right to preserve the condentiality of any consultation it may have with its attorney concerning the underlying claim and its coverage determination [N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. at 369]. Another court reasoned that the access to records and cooperation clauses do not waive privilege because the cedents obligations under these provisions end when the cedent and reinsurer become adversaries [U.S. Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992), reported in Mealeys Litigation Reports: Reinsurance, Vol. 4, No. 4 at F-2].
40.10[3][b] Know When Privileged Documents Are In Issue Therefore Requiring Production by Cedent. Some reinsurers seeking access
to privileged documents under an inspection clause have argued that the cedent waived any applicable privileges by putting the subject matter of the documents in issue in the dispute between the parties. The in issue or at issue exception to the attorney-client privilege applies when a party asserts a claim or defense that he intends to prove by use of the privileged materials [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *17 (S.D.N.Y. 1995)]. Often, the in issue exception is an application of waiver principles, where the courts nd that the party intending to rely on privileged materials to prove its claim or defense implicitly waives the privilege. (The question of the scope of that waiver is tethered to the offer of proof the party relying on the privileged materials intends to make.) In the majority of the reported decisions considering the in issue exception in the context of a reinsurance dispute, courts have determined that the in issue exception has not applied. [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *16-17 (S.D.N.Y. 1995); N. River Ins. Co. v. Phila. 40-53
40.10[3][b]
Reinsurance Corp., 797 F. Supp. at 370-71; U.S. Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992), reported in Mealeys Litigation Reports: Reinsurance, Vol. 4, No. 4 at F-2]. Several courts have reasoned that merely placing the broad question of coverage in issue is insufficient to constitute a waiver of the privilege [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *17; N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. at 370-71]. It should be noted, however, that in a recent decision a court did nd a limited waiver based on the in issue doctrine. In American Re-Insurance Co. v. United States Fid. & Guar. Co. [No. 604517/02 (N.Y. Sup., App. Div., 1st Dept. May 29, 2007), reported in Mealeys Litigation Reports: Reinsurance, Vol. 18, No. 3 at B-1], the court ruled that a cedent waived attorney-client privilege when its reinsurance director responsible for preparing the bill to the reinsurers testied during a deposition that in preparing the bill he sought guidance from an in-house attorney who explained to him that the settlement of the insureds claim was based on Californias all sums and non-accumulation rules. The court ruled that the reinsurers were entitled to seek further testimony and the production of documents regarding the presentation of the reinsurance claim to the extent that such discovery related to the disclosures made by the reinsurance director during his deposition.
Example: A cedent refused to produce privileged documents
that revealed its internal legal assessments of the claims for which it was requesting reinsurance payment in a reinsurance arbitration. Although the arbitration panel ordered the cedent to produce the documents and warned that it would draw whatever negative inference it deemed appropriate from a failure to produce, after the cedent refused to produce the material (on the basis that it wished to avoid waiver of privilege in future dealings with its insureds) the panel ordered the reinsurer to pay the balance owed. The reinsurers motion to vacate the panels order was denied [Natl Cas. Co. v. First State Ins. Group, 430 F.3d 492, 494-97 (1st Cir. 2005)].
Exception Notice Condition Precedent to Coverage: In a direct
insurance coverage dispute where timely notice was a condition precedent to coverage, a court found that, by seeking coverage, the insured put in issue its knowledge regarding its potential liability to the claimant and regarding its notice 40-54
40.10[3][c]
obligations. The court emphasized that the insured had the burden to prove that notice was timely, and therefore it had impliedly waived the attorney-client privilege as to communications with its attorney relevant to knowledge of its potential liability [Century 21, Inc. v. Diamond State Ins. Co., 2006 U.S. Dist. LEXIS 56733, at *5-10 (S.D.N.Y. 2006)].
40.10[3][c] Consider Application of Common Interest Doctrine to Compel Production of Cedents Privileged Documents. 40.10[3][c][i] Prior to Dispute Between Cedent and Reinsurer. Re-
insurers have tried to use the common interest doctrine as a sword to gain access to a privileged materials over its cedents objection. It is unclear whether courts will nd that a common interest exists if the parties are not involved in a legal dispute. In many of the cases nding common interest protection as against the policyholder [see 40.10[2][c] above], the cedents and reinsurers were found to be united in interest due to the cedents involvement in coverage litigation at the time of disclosure. In contrast, in the few reported cases rejecting common interest claims by reinsurers, the interests between cedents and reinsurers were already adverse [see 40.10[3][c][ii] below]. The absence of an adversarial relationship between cedent and reinsurer may not guarantee a common interest forcing disclosure, however. At least one court has advised that a cedents disclosure to its reinsurer was not in furtherance of a common interest at the time the cedent sought payment under the reinsurance contract and before there was a legal dispute [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *15 (S.D.N.Y. 1995)]. In another case, the court ordered disclosure of allegedly privileged documents to a policyholder based on the cedents disclosure to a reinsurer, when there was no indication as to whether the reinsurer/cedent relationship was adversarial at the time of disclosure [McLean v. Contl Cas. Co., 1996 U.S. Dist. LEXIS 17503, at *2 (S.D.N.Y. 1996)]. In addition, one court has gone so far as to reject the theory that a common interest ever exists between cedent and reinsurer, even at the pre-dispute stage, stating that the common interest doctrine is completely unlashed from its moorings in traditional privilege law when it is held broadly to apply in contexts other than when there is dual representation [N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 367 (D.N.J. 1992) affd in part and revd in part on other grounds, N. River Ins. Co. v. CIGNA 40-55
40.10[4]
Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995)].

40.10[3][c][ii] During Reinsurance Dispute Between Cedent and Reinsurer. In general, reliance on the purported common inter-
est between parties at odds with each other is not a sound basis to predicate the compelled disclosure of privileged communications. In the courts, reinsurers seeking privileged documents under the common interest doctrine have been unsuccessful when the parties are already embroiled in a reinsurance dispute [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *5-15 (S.D.N.Y. 1995); N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 366-68 (D.N.J. 1992) affd in part and revd in part on other grounds, N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995); U.S. Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992), reported in Mealeys Litigation Reports: Reinsurance, Vol. 4 No. 4 at F-2]. Reinsurers may be less likely to obtain a cedents privileged documents during reinsurance litigation because the reinsurers alleged breach of the reinsurance agreement suspends the cedents disclosure obligations pursuant to the inspection clause [U.S. Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992), reported in Mealeys Litigation Reports: Reinsurance, Vol. 4 No. 4 at F-1]. Reinsurers are more likely to obtain a cedents privileged documents regarding the underlying claim in arbitrations, however, where arbitrators can more easily impose condentiality restrictions and are not bound to follow strict rules of law or evidence. In all likelihood, if the Panel orders disclosure in a condential proceeding over the cedents objection, that should not waive privilege vis-a-vis others.
40.10[4] Understand When Insured Is Entitled to Discover Its Insurers Reinsurance Information. Policyholders often seek access to correspon-
dence, reports, agreements and other materials exchanged between the cedent and its reinsurer which may or may not otherwise be subject to protection by the attorney-client privilege or the work product doctrine. In some instances, policyholders hope to strengthen coverage claims by nding admissions or inconsistencies in these materials. Ceding insurers typically oppose requests for reinsurance information by arguing that it is not relevant to the underlying coverage dispute or that the information is condential and proprietary. 40-56
40.10[4]
A majority of courts have held that the existence of reinsurance agreements and the terms of coverage are relevant to insurance coverage disputes and therefore discoverable. Many of these decisions are premised on the disclosure mandated by Rule 26(a)(1)(D) of the Federal Rules of Civil Procedure, which states that a party shall, without awaiting a discovery request, provide to other parties . . . any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment which may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment [Country Life Ins. Co. v. St. Paul Surplus Lines Ins. Co., 2005 U.S. Dist. LEXIS 39691, at *28-29 (C.D. Ill. 2005); Medmarc Cas. Ins. Co. v. Arrow Intl, Inc., 2002 U.S. Dist. LEXIS 15082, at * 9 (E.D. Pa. 2002); Mo. Pac. R.R. Co. v. Aetna Cas. & Sur. Co., 1995 U.S. Dist. LEXIS 22157, at *6-7 (N.D. Tex. 1995); Natl Union Fire Ins. Co. of Pittsburgh, Pa. v. Contl Ill. Corp., 116 F.R.D. 78, 83-84 (N.D. Ill. 1987)]. In some instances, courts have acknowledged that reinsurance agreements contain proprietary or condential information and ordered production of the contracts pursuant to a protective order, or have simply noted the existence of a condentiality agreement precluding wider dissemination of the material [Ohio Mgmt., LLC v. James River Ins. Co., , 2006 U.S. Dist. LEXIS 47516, at *6 (E.D. La. 2006); Peco Energy Co. v. Ins. Co. of N. Am., 852 A.2d 1230, 1234 (Pa. Super. Ct. 2004)]. Ceding insurers attempts to block access to other types of reinsurance information, including reports and other correspondence between cedents and reinsurers, have yielded mixed results. Efforts to avoid discovery are most successful when the policyholder fails to indicate how the reinsurance information is relevant to the coverage dispute or might lead to the discovery of admissible evidence. For example, access to communications between cedents and reinsurers has been denied where the policyholder has argued that it hoped to gather evidence showing that the policy language at issue was ambiguous [Zurich Am. Ins. Co. v. Keating Bldg. Corp., No. 04-1490 (D.N.J. Dec. 29, 2006), reported in Mealeys Litigation Reports: Insurance, Vol. 21, No. 16, at 7; Country Life Ins. Co. v. St. Paul Surplus Lines Ins. Co., 2005 U.S. Dist. LEXIS 39691, at *30-32 (C.D. Ill. 2005); Medmarc Cas. Ins. Co. v. Arrow Intl, Inc., 2002 U.S. Dist. LEXIS 15082, at * 13 (E.D. Pa. 2002); Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 139 F.R.D. 609, 612 (E.D. Pa. 1991)]. Reinsurance communications have been found relevant and discoverable typically when there is a defense raised by the ceding insurer in a direct coverage dispute, such as misrepresentation/ 40-57
40.10[4]
nondisclosure or lack of late notice, which puts the reinsurance information at issue, or to reconstruct a lost policy or provide extrinsic evidence of an ambiguous policy provision.
Example Reinsurance Communications Relevant: Insurers com-
munications with reinsurers were found relevant to a claim for rescission of the policies based on the policyholders alleged misrepresentations as to its nancial condition. The court reasoned that pre-policy-issuance communications with reinsurers could reveal what nancial information the insurers relied upon when deciding to issue the policies [Natl Union Fire Ins. Co. of Pittsburgh, Pa. v. Contl Ill. Corp., 116 F.R.D. 78, 82 (N.D. Ill. 1987)]. In addition, post-issuance communications with reinsurers were relevant to the insurers allegation that the policyholder breached its duty to cooperate with insurers [id. at 82-83]. Similarly, communications between an insurer and its reinsurer were relevant to an insurers claim for rescission based on the policyholders alleged misrepresentation concerning his health [Sotelo v. Old Republic Life Ins., 2006 U.S. Dist. LEXIS 68387, at * 8 (N.D. Cal. 2006)].
Example Reinsurance Communications Relevant: Reinsurance
information was directly relevant to rebutting the insurers affirmative defense of late notice because evidence that reinsurers were given timely notice would tend to establish that the insurers themselves had notice [Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 1991 U.S. Dist. LEXIS 16336, at *6-7 (E.D. Pa. 1991); Peco Energy Co. v. Ins. Co. of N. Am., 852 A.2d 1230, 1233-34 (Pa. Super. Ct. 2004)].
Example Reinsurance Communications Relevant: Notes and
memoranda prepared by reinsurers claim representatives concerning information relayed by the cedents claims personnel concerning a policyholders claim were relevant to a direct coverage dispute. The court reasoned that the materials were likely to elucidate conicts between the cedent and its reinsurers which might explain why the ceding insurer had refused to pay the claim [Allendale Mut. Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 139 (N.D. Ill. 1993)].
Example Reinsurance Communications Irrelevant: A federal dis-
trict court for the District of Columbia ordering discovery of the existence and contents of the ceding insurers reinsurance agree40-58
40.11
ments denied discovery of other reinsurance communications on relevance grounds, also noting that the correspondence may well constitute proprietary information [Potomac Elec. Power Co. v. Cal. Union Ins. Co., 136 F.R.D. 1, 3 (D.D.C. 1990)].
t Warning: If a cedent summarizes advice given by coverage
counsel in correspondence with its reinsurer, the summary information may be deemed to constitute ordinary business communications and will therefore not be protected from disclosure under the attorney-client privilege or work product immunity [see Am. Cas. Co. of Reading Pa. v. Gen. Metals of Tacoma, No. C 92-5192B (W.D. Wash. April 13, 1994), reported in Mealeys Litigation Reports: Reinsurance, Vol. 4, No. 23, at B-1].
Cross Reference: For a discussion of additional cases considering the discovery of reinsurance information in coverage actions between a ceding insurer and its insured, see Eric Mills Holmes, Appleman on Insurance 2d 107.3; Mitchell L. Lathrop, Insurance Coverage for Environmental Claims 25.05[2][c]. 40.11 Consider Reinsurers Rights Under Right to Associate Clause or Claims Control Clause. Related to the right to inspect the cedents records is the
reinsurers right to associate in, or to control, the defense of claims. These rights are embodied in right to associate or claims control clauses. Under a right to associate (sometimes called a claims cooperation) clause, the reinsurers exercise of the right is discretionary, but the cedent is required to make prompt disclosure of information that the reinsurer needs to decide whether to associate with the cedent in defense of a claim. A right to associate clause typically gives the reinsurer the right to participate in the defense and control of any claim, suit or proceeding which may involve [the] reinsurance with the full cooperation of [the cedent] [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1055 (2d Cir. 1993)]. A court considering this language declared that the phrase which may involve [the] reinsurance does not mean which may involve insurance underlying this reinsurance [Unigard Sec. Ins. Co. Inc. v. N. River Ins. Co., 762 F. Supp. 566, 587 (S.D.N.Y. 1991), affd in part, revd in part, 4 F.3d 1049, 1055 (2d Cir. 1993)]; therefore, there is no right to associate if there is no direct impact on the reinsurance coverage [id.]. Claims control clauses are not typical. They go further than right to associate clauses in giving the reinsurer control over claims settlements. These provisions, sometimes termed counsel and concurrence or concur and consent clauses, not only give the reinsurer the right to be 40-59
40.11
involved in the adjustment of a claim but also obligate the cedent to confer with and secure the agreement of the reinsurer to settle claims of certain types or amounts in order to be indemnied. In the U.S. market, counsel and concur provisions are usually found in clauses that provide excess limits and extra-contractual (ECO) coverage [see 40.14 below for a general discussion of the reinsurers obligation to reimburse the cedent for these types of losses]. Some clauses go further still and give the reinsurer broad authority over claims handling. A cedents failure to provide the notice required by a claims cooperation clause can arguably provide a defense to coverage [Liberty Mut. v. Gibbs, 773 F.2d 15, 17-18 (1st Cir. 1985); see 40.09 above for a complete discussion of the cedents notice obligations and the consequences of a breach of this obligation]. Similarly, a cedents failure to comply with the terms of a claims control clause may provide an affirmative defense to a claim for payment [Certain Underwriters at Lloyds London v. Home Ins. Co., 783 A.2d 238, 239-242 (N.H. 2001); Argonaut Ins. Co. v. Certain London Mkt. Reinsurers, No. 03-317805 (Cal. Super. Ct. Nov. 13, 2006), reported in Mealeys Litigation Report: Reinsurance, Vol. 17, No. 15 at A-4]. However, denial of coverage for a violation of the right to associate may not succeed if the reinsurer cannot show that it was prejudiced and the cedent did not act in bad faith [see N. River Ins. Co. v. Cigna Reinsurance Co., 52 F.3d 1194, 1216 (3d Cir. 1995); Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049, 1068-70 (2d Cir. 1993)].
Example: Reinsurers were required to indemnify a cedent for expenses
incurred after instructing the cedent how to handle a claim pursuant to a claims control clause providing for indemnication for any and all loss or expense which the Reinsured may sustain by reason of having fullled [Reinsurers] instruction [La Reunion Francaise v. Martin, 1996 U.S. App. LEXIS 9578, at *3-4 (2d Cir. 1996) (unpublished opinion)].
t Warning: Reinsurers that choose to associate in the handling of a
claim should do so cautiously, in order to preserve the legal position that there is no privity of contract between an insured or a third-party claimant in an action against an insured and the reinsurer [see 40.05[1] above discussing the general lack of privity of contract in reinsurance arrangements]. Reinsurers that are intimately involved in the claims-handling process run the risk of being held directly liable to policyholders or third parties for the cedents insurance obligations or its settlement actions [see Slotkin v. Citizens Cas. Co. of New York, 614 F.2d 301, 316-17 (2d Cir. 1979), adhered to on rehearing, 614 F.2d 301, 323; 40-60
40.11
OHare v. Pursell, 329 S.W.2d 614, 621 (Mo. 1959)]. At a minimum, a reinsurer increases the likelihood that a court will order discovery against it in a coverage case so as to enable the policyholder to test whether the reinsurer should be found to be an alter ego or the real party in interest; this is especially a risk where the cedent is a fronting insurer or where the reinsurer is exposed to paying the bulk of the policyholders claim. In one case where the reinsurance contract was viewed by the court as not otherwise covering punitive damages, a reinsurer was obligated to pay its proportionate share of liability for its cedents bad faith failure to settle a third-party claim against its insured, where the reinsurer was engaged in a joint enterprise with the cedent in defending and settling the third-party action [Peerless Ins. Co. v. Inland Mut. Ins. Co., 251 F.2d 696, 703-04 (4th Cir. 1958); but see Reid v. Ruffin and Granite Mut. Ins. Co., 469 A.2d 1030, 1033 (Pa. 1983)]. To avoid potential liability for claims handling and settlement, reinsurers should carefully consider whether or not to incorporate a claims control or counsel and concurrence clause in their reinsurance agreements and the appropriate degree of participation in the claims process.
Consider: A clause requiring the reinsurers consent to settlements may
be in conict with a follow the settlements provision, which obligates the reinsurer to indemnify its cedent for any losses within the terms of the original policy, as long as the cedent has acted in good faith.
Cross Reference: For a discussion of follow the settlements clauses in reinsurance agreements, see 40.17 below. Cross References: For an example of a claims cooperation clause, see
40.41 below.
40-61
V.
CONSIDERING REINSURERS OBLIGATIONS.
40.12 Determine Extent of Coverage. The reinsuring or business cov-
ered clause of a reinsurance treaty typically determines the extent of the reinsurers liability to the cedent [see 40.30, 40.31 and 40.32 below for examples of reinsuring clauses]. This clause species the types of risks included in the agreement and the percentage of business covered (for a quota share contract) or the attachment point and limits of the agreement (for an excess of loss contract). Facultative certicates, in turn, typically include a liability clause, which species the liability of the reinsurer and provides that the reinsurance certicate will cover only the kinds of liability covered in the original policy. Facultative certicates often include follow the form clauses, which provide that the reinsurance coverage dovetails with or adopts as its own the terms of the coverage of the underlying policy. This presumption is not absolute, however, and can be overridden by express wording in the certicate creating a nonconcurrency as to liability. As a general rule, in both treaties and facultative certicates, the extent of the reinsurers liability is determined by the express wording of the reinsurance agreement. A reinsurer will not be held liable beyond the terms of the reinsurance contract merely because the ceding insurer has sustained a loss. The fact that the direct insurer has paid a claim does not establish that it is entitled to indemnity from the reinsurer because the claim might have been one for which the insurer was not bound to make payment [Mich. Millers Mut. Ins. Co. v. N. Am. Reinsurance Corp., 452 N.W.2d 841, 842-43 (Mich. Ct. App. 1990); Independence Ins. Co. v. Republic Natl Life Ins. Co., 447 S.W.2d 462, 467-69 (Tex. Civ. App. 1969)]. For example, cedents that make ex gratia or voluntary payments (payments made in the absence of any legal obligation to pay) are not entitled to indemnity from their reinsurers unless the reinsurance contract provides to the contrary [Am. Ins. Co. v. N. Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 81 (2d Cir. 1982); Lexington Ins. Co. v. Prudential Reinsurance Co. of Am., 1997 Mass. Super. Lexis 593, at * 10-19 (Mass. Super. Ct. 1997)]. Reinsuring clauses should be drafted carefully to avoid disputes concerning the scope of coverage [N. River Ins. Co. v. Cigna Reinsurance Co., 52 F.3d 1194, 1206-07 (3d Cir. 1995)].
Example: A reinsurer was not liable to cover a payment for lost cargo
under a facultative certicate where the loss was due to a shore risk because the defendant never consented to reinsure this loss not covered in the original insurance policy [Ins. Co. of N. Am. v. U.S. Fire 40-62
40.12
Ins. Co., 322 N.Y.S.2d 520, 524 (N.Y. Sup. Ct. 1971)].
Example: A reinsurance certicate referring to the direct policys terms
as the limitations on liability could not be construed to provide coverage for claims that were expressly excluded by the underlying policy [Ambassador Ins. Co., Inc. v. Fortress Re, Inc., 1983 U.S. Dist. LEXIS 14685, at *31 (M.D.N.C. Aug. 12, 1983)].
Example: A cedents motion for summary judgment on its indemnity
claim against its reinsurer was denied where a substantial portion of the settlement paid to the insured was attributable to legal expenses, a loss not reinsured under the facultative certicate [Affiliated FM Ins. Co. v. Employers Reinsurance Corp., 2004 U.S. Dist. LEXIS 27961, at *43 (D.R.I. 2004)]. The cedent also had failed to demonstrate that the losses actually occurred during the coverage period of the certicate [id. at 46].
Example: Indemnity under facultative certicates was limited to the
amounts expressly stated in the certicates and was not coextensive with the underlying policies: if [the ceding insurer] were allowed to recover its full liability to [the insured] simply because it held some amount of reinsurance, the negotiated coverage limits of the reinsurance certicates would be rendered meaningless [Travelers Cas. and Sur. Co. v. Constitution Reinsurance Corp., 2004 U.S. Dist. LEXIS 21829, at *13 (E.D. Mich. 2004)].
Cedents Perspective: Many reinsurance contracts include follow the
fortunes or follow the settlements clauses, which have been interpreted to embody the principle that a reinsurer will indemnify its cedent for any losses arguably within the terms of the original policy so long as the cedent has acted in good faith. These clauses operate primarily for the benet of cedents, allowing them some measure of certainty in calculating expected reinsurance recoveries and discouraging reinsurers from challenging a cedents coverage decisions [See 40.17, 40.18 and 40.19 for a complete discussion of follow the fortunes and follow the settlements clauses]. Occasionally disputes arise in which cedents assert that follow the fortunes or follow the settlements clauses obligate a reinsurer to provide indemnity despite reinsurance contract wording excluding the particular loss from coverage or for other ex gratia payments. This argument is usually unsuccessful because the general doctrine of follow the fortunes/ settlements must yield to the express terms of the reinsurance agreement, requiring only that the cedent make the underlying payment in 40-63
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good faith and exercise ordinary prudence. [Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910, 913 (2d Cir. 1990); Am. Ins. Co. v. N. Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 80-81 (2d Cir. 1982); Commercial Union Ins. Co. v. Swiss Re Am. Corp., 2003 U.S. Dist. LEXIS 4974, at *32-48 (D. Mass. 2003)]. Even in the absence of a follow the settlements provision, many cedents argue that they are invested with a zone of discretion to make loss payments in good faith; otherwise, public policies fostering settlements would be undermined inasmuch as the cedent might choose to litigate claims with its policyholder so as to avoid creating an unintended gap with its reinsurance recovery.
Consider: Some reinsurance agreements include cash call provisions. Cash call clauses can provide for reinsurance payment to be made before, or at the same time, the ceding company makes a payment to its insured. 40.13 Consider Obligation to Reimburse Insurer for Declaratory Judgment Expense. Declaratory judgment expenses are the expenses an insurance
company incurs in seeking a judicial determination of its obligation to provide insurance coverage to its policyholder and pay claims under an insurance policy. These legal expenses can arise when either the insured or the insurer initiates a lawsuit to determine whether a claim is covered. Ceding insurers often seek indemnity from their reinsurers for declaratory judgment expenses. A reinsurers obligation to reimburse its cedent for declaratory judgment depends on the wording of the reinsurance contract, often its denition of allocated loss expenses to be paid by the reinsurer. The most recent reported decisions evidence a trend toward allowing cedents to recover declaratory judgment expenses; importantly, however, the reinsurance contract wording controls in all circumstances, so counsel must evaluate the language of the particular reinsurance agreement carefully.
Example Declaratory Judgment Expenses Recoverable: Reinsurance
certicates providing for coverage of expenses incurred in the investigation and settlement of claims or suits was ambiguous; after consideration of evidence of custom and usage, the court found that the disputed language covered the declaratory judgment expenses sought by the cedent [Firemans Fund Ins. Co. v. Gen. Reinsurance Corp., 2005 U.S. Dist. LEXIS 43650, at *31-33 (N.D. Cal. 2005)].
Example Declaratory Judgment Expenses Recoverable: There was no
question that the allocated loss expense provision requiring payment 40-64
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for all expenses incurred in the investigation and settlement of claims or suits included the declaratory judgment expenses incurred by a reinsured attempting to avoid coverage for a claim [Employers Ins. Co. of Wausau v. Am. Reinsurance Co., 256 F. Supp. 2d 923, 925 (W.D. Wis. 2003)]. A sentence in the provision stating that allocated loss expenses shall not include expenses incurred by [the cedent] in regard to any actual or alleged liability that is not within the circumscribed provisions of the policy reinsured was an exclusion of expenses relating to the cedents extracontractual or tortious (i.e., bad faith) conduct and was not an exclusion of declaratory judgment expenses [id.].
Example Declaratory Judgment Expenses Recoverable: A reinsurance
provision requiring reimbursement of claim expenses, dened as all payments under the supplementary payments provision of [the ceding insurers] policy, including court costs, interest upon judgments, and allocated investigation, adjustment and legal expenses, required payment of fees and expenses incurred in a declaratory judgment action [Employers Reinsurance Corp. v. Mid-Continent Cas. Co., 202 F. Supp. 2d 1221, 1235-36 (D. Kan. 2002), affd, 358 F.3d 757, 768 (10th Cir. 2004)].
Example Declaratory Judgment Expenses Recoverable: A facultative
certicate stating that the Reinsurer shall pay its proportion of expenses (other than office expenses and payments to any salaried employee) incurred by the [cedent] in the investigation and settlement of claims or suits was ambiguous with respect to the payment of declaratory judgment expenses, so evidence of industry standards and customs was reviewed to determine contractual intent [Affiliated FM Ins. Co. v. Constitution Reinsurance Corp., 626 N.E.2d 878, 881-82 (Mass. 1994). A jury reviewing evidence of reinsurance custom and practice determined that a common understanding existed between the parties requiring the reinsurer to indemnify the cedent for declaratory judgment expenses [see Affiliated FM Ins. Co. v. Constitution Reinsurance Corp., No. 89-2411 (Mass. Super. Ct. Sept. 24, 1998), reported in Mealeys Litigation Reports: Reinsurance, Vol. 9, No. 10, at 1].
Example Declaratory Judgment Expenses Not Recoverable: Recovery
of declaratory judgment expenses was denied where the reinsurance certicates included a clause stating: [t]his Certicate of Reinsurance is subject to the same risks, valuations, conditions, endorsement (except change of location), assignments and adjustments as are or may be assumed, made or adopted by the reinsured, and loss, if any, 40-65
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hereunder is payable pro rata with the reinsured and at the same time and place [British Intl Ins. Co. v. Seguros La Republica, S.A., 2001 U.S. Dist. LEXIS 11453, at *2 (S.D.N.Y. 2001)]. On appeal, the court rejected the reinsureds argument that the certicates were ambiguous with respect to recovery of declaratory judgment expenses because the word expenses did not appear anywhere in the certicates [British Intl Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 82-83 (2d Cir. 2003)].
Cross References: For a discussion of the equitable and policy arguments advanced by cedents and reinsurers in disputes over reimbursement of declaratory judgment expenses, see Mitchell L. Lathrop, Insurance Coverage for Environmental Claims 10.06[6]; Eric Mills Holmes, Appleman on Insurance 2d 106.6. 40.14 Consider Obligation to Reimburse Insurer for Extra-Contractual Obligations and Excess of Policy Limits (ECO/XPL) Damages. 9 Bad Faith: As a general rule, reinsurers are required to indemnify
ceding insurers only to the extent that the ceding insurers payments or losses are within the scope of the original policys terms [Am. Ins. Co. v. N. Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 81 (2d Cir. 1982)]. A reinsurer will not be held liable for payments in excess of policy limits (XPL), that is, payment for what is sometimes called thirdparty bad faith, or for the extra-contractual obligations (ECO) of the cedent, that is, payment for rst-party bad faith, unless the reinsurance contract is interpreted as covering that exposure [see Reliance Ins. Co. v. Gen. Reinsurance Corp., 506 F. Supp. 1042, 1050 (E.D. Pa. 1980)]. There are differing opinions as to whether the reinsurance contract must cover such exposures expressly in order for the reinsurer to be held liable for them. An exception to the general rule that arises on rare occasions is when the reinsurer actively participates in the defense or settlement of a claim under the direct insurance policy. In those circumstances, a court may conclude that the reinsurer has acted as a co-insurer or joint venture, thereby subjecting itself to liability for losses in excess of the stated policy limits [see Peerless Ins. Co. v. Inland Mut. Ins. Co., 251 F.2d 696, 703-04 (4th Cir. 1958); but see Employers Reinsurance Corp. v. Am. Fid. & Cas. Co., 196 F. Supp. 553, 560-61 (W.D. Mo. 1959)]. Cedents can secure XPL or ECO coverage by including clauses in their reinsurance contracts that specically address these obligations. Most cedents request these provisions to address the risk that tort claims against 40-66
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their insureds will not be resolved within applicable policy limits following the cedents unreasonable failure to effect a settlement or that bad faith claims will be directed at the cedents conduct in handling the insureds claim for coverage. Inclusion of XPL and ECO clauses removes the uncertainty as to whether such losses will be covered under the reinsurance contract. An XPL clause specically provides coverage for losses in excess of the policy limits in the insurance policy issued by the cedent to its policyholder and typically appears in reinsurance treaties covering liability business. An XPL clause covers payment by a cedent arising from a judgment against its insured in excess of the reinsureds policy limits, but otherwise covered, where the size of the judgment was affected by the cedents negligence, fraud or bad faith in handling the claim or in the settlement or defense of the lawsuit against the insured. The reinsurance contract usually limits the amount paid by a reinsurer on an XPL claim to an amount within the overall reinsurance limit. An XPL clause is not intended to cover amounts the cedent is found liable to pay directly to its insured as compensation or punitive damages due to its own misconduct to its insured, rather than indirectly on account of its failure to resolve the policyholders liability to others. [See 40.44 for an example of an XPL clause included in a reinsurance treaty.] An ECO clause is similar to an XPL clause in that it covers the liability of the cedent due to mishandling or defense of claims but it focuses on the cedent-insurers obligation to act in good faith relative to its own insured. By denition, extra-contractual obligations incurred by the cedent are extra or outside the coverage provided by the policy. For example, ECO clauses can provide for indemnication of payments to an insured for punitive damages and emotional distress caused by the cedents tortious conduct or failing to treat the insured fairly and in good faith. [See 40.43 for an example of an ECO clause.] In addition, an ECO clause may be drafted to cover a ceding insurers exposure when its insured is found liable to a third party for punitive damages, though this may be more probably understood as an XPL exposure.
t Warning: In some states, public policy concerns preclude insurance indemnication for punitive damages awards [see Home Ins. Co. v. Am. Home Prod. Corp., 550 N.E.2d 930, 932 (N.Y. 1990)]. A reinsurance contract including an ECO clause covering liability for bad faith judgments may be interpreted not to cover punitive damages in states where insurance for punitive damages awards is prohibited. A reinsurer could assert that, because the states public policy prohibits insurance for punitive damages, reinsurance for punitive damage
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awards also should be prohibited. However, a federal district court in Connecticut refused to vacate an arbitration award directing a reinsurer to reimburse its cedent for punitive damages where the reinsurance contracts included ECO clauses, despite Connecticuts public policy against insurance for such awards. The court ruled that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which governed the international arbitration, preempted Connecticut law, that the Convention looked to the public policy of the country in which enforcement of the arbitral award is sought and that the United States does not have a public policy against contractual indemnication of punitive damages [Hartford Fire Ins. Co. v. Lloyds Syndicate, 1997 U.S. Dist. LEXIS 10858, at *14-18 (D. Conn. 1997)]. Further, if a ceding insurer pays punitive damages in circumstances where the legality of indemnication is unsettled, a reinsurer may be obligated to follow the fortunes of its cedent and provide reimbursement.
z Strategic Point: The specic language of ECO or XPL clauses can
vary and make a signicant difference in the coverage afforded. Parties to the reinsurance agreement should draft these provisions carefully to ensure appropriate coverage and to avoid disputes.
Cross References: For discussions of circumstances under which reinsurance potentially covers punitive damages, see Eric Mills Holmes, Appleman on Insurance 2d 127.5; Mitchell L. Lathrop, Insurance Coverage for Environmental Claims, 10.06[3].
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VI.
CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE FIDEI.
40.15 Consider Insurers Duty to Disclose to Reinsurer All Material Facts About Risk Being Reinsured. The law and practice of the reinsurance
industry recognize that the relationship between parties to a reinsurance agreement is characterized by uberrimae dei or utmost good faith, which entails mutual trust and regard for the interest of the other party. Both parties to a reinsurance contract must treat each other with the utmost good faith in terms of disclosing all facts that are material to the risk reinsured and in conducting themselves in business dealings that may affect the others legal liability under the contract. Specically, utmost good faith means that the maxim caveat emptor does not apply to the reinsurance relationship [Barry R. Ostrager and Mary Kay Vyskocil, Modern Reinsurance Law and Practice (2d ed. 2000) 3.01[a], citing Blacks Law Dictionary 1520 (6th ed. 1990)]. The duty of utmost good faith arises from the recognition that the reinsurer does not perform all the actions that would be taken if it was placing original coverage, but has to rely on the cedent to do so. A reinsurer is not intimately involved in underwriting the ceded business or in handling claims subject to the reinsurance agreement; instead, the reinsurer is dependent upon and must be able to rely on the cedent to perform these functions. Although cases regarding the doctrine of utmost good faith focus primarily on the cedents duties to the reinsurer, particularly in terms of affirmatively disclosing material facts about the ceded business during the reinsurance placement process, it is a mutual obligation [Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 829 n.3 (9th Cir. 1995); United Fire & Cas. Co. v. Arkwright Mut. Ins. Co., 53 F. Supp. 2d 632, 642 (S.D.N.Y. 1999)]. The facts and circumstances of the reinsurance relationship are important in determining the existence and scope of the duty. The doctrine is most often referenced in terms of the cedents duty to disclose material facts about the risk that the reinsurer is reinsuring [A/S Ivarans Rederei v. Puerto Rico Ports Auth., 617 F.2d 903, 905 (1st Cir. 1980)]. A ceding company that conducts an investigation and is in possession of all of the details relating to the risk must exercise the utmost good faith in revealing all facts that materially affect the risk of which it is aware and of which the reinsurer has no reason to know [Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 278 (2d Cir. 1992)]. A cedent is required to place the [reinsurance] underwriter in the same position as himself [and] to give to him the same means and opportunity of judging 40-69
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the value of the risks [Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 510 (1883)]. A fact will be deemed material if it would have either prevented a reinsurer from issuing a policy or prompted a reinsurer to issue it at a higher premium had it been disclosed before the reinsurance contract was executed [Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d. at 279; In re Liquidation of Union Indem. Ins. Co. of N.Y., 674 N.E.2d 313, 320 (N.Y. 1996)]. Disclosure is required, for example, [w]here the reinsured has offered extended coverage or an unusual term [Sumitomo Marine & Fire Ins. Co. v. Cologne Reinsurance Co., 552 N.E.2d 139, 143 (N.Y. 1990)]. The following are additional types of information that have been found to be material to the underwriting process:
The premium rate, volume or sufficiency; Prior signicant losses or legal actions against the insured; The underwriting agents role; The geographical spread of the underlying risks; and The type of business ceded.
The duty of utmost good faith also applies to the relationship between a retrocedent and its retrocessionaire [Compagnie de Reassurance DIle de France v. New England Reinsurance Corp., 57 F.3d 56, 66-70 (1st Cir. 1995)]. Whether the reinsurance intermediary is an agent of the cedent or the reinsurer is a fact based inquiry. Under typical circumstances, the intermediary is the agent of the ceding company. Hence, a reinsurance intermediary may be held to be the agent of the ceding company in terms of the representations made to the reinsurer during the reinsurance placement process [see Old Reliable Fire Ins. Co. v. Castle Reinsurance Co., Ltd., 665 F.2d 239 (8th Cir. 1981); Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623 (D. Neb. 1980)].
Example: The reinsurers defense of fraud in the inducement and avoidance of the reinsurance treaties was upheld where the ceding insurer failed to disclose its insolvency [In re the Liquidation of Union Indem. Ins. Co. of N.Y., 674 N.E.2d 313, 320 (N.Y. 1996)]. Example: Reinsurers were entitled to rescission of a reinsurance
contract where the cedent failed to disclose the existence of unimplemented recommendations made as part of a survey report prepared in 40-70
40.15
connection with the underwriting of an earlier insurance policy, and the reinsurers had previously informed the cedent that they considered compliance with the survey report recommendations to be material [Allendale Mut. Ins. Co. v. Excess Ins. Co., 992 F. Supp. 278, 282-83 (S.D.N.Y. 1998)].
Example: Substantial evidence of material misrepresentations sup-
ported a jury verdict where the cedent hid from its reinsurer the dangerous nature of the insureds business, misstated the insureds previous loss record and did not reveal the nature of the underlying insurance [Sec. Mut. Cas. Co. v. Affiliated FM Ins. Co., 471 F.2d 238, 241, 245-46 (8th Cir. 1972)].
Example: Where the ceding insurer had no reason to believe that its reinsurer would consider the direct insureds distribution of ATVs material to the nature of the risk because the insurer itself did not view it as such when the reinsurance contract incepted, the failure to disclose this information did not deprive the reinsurer of the same opportunity the cedent had to assess the risk, and the reinsurers misrepresentation claim was properly dismissed [Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992)]. Examples: Some courts have found that reinsurers have a duty to
investigate the reinsurance transaction, and a failure to do so may provide a defense to a claim for rescission based on an omission where the cedent lacked the intent to deceive. For example, in rejecting certain claims of fraudulent inducement, the First Circuit Court of Appeals stated: [w]ithout rst being asked by the other party, one would not expect [the cedents] to volunteer a plethora of details on their proposed underwriting practices. Matters would have been different had [the cedents] affirmatively misrepresented their intended underwriting practices or given incomplete, evasive or incorrect answers to questions asked . . . . [Compagnie De Reassurance Dlle de France v. New England Reinsurance Corp., 57 F.3d 56, 80 (1st Cir. 1995); see also Old Reliable Fire Ins. Co. v. Castle Reinsurance Co., Ltd., 665 F.2d 239, 244 (8th Cir. 1981); Unigard Sec. Ins. Co. v. Kansa Gen. Ins. Co., Ltd., 1992 U.S. Dist. LEXIS 20677, at *22 (W.D. Wash. Nov. 9, 1992), affd 1994 U.S. App. LEXIS 35914 (9th Cir. 1994)].
Consider: In some states, the duty to disclose all material facts to the reinsurer is required by statute [see Cal. Ins. Code 622]. Consider: It has been argued that a cedents duty to disclose informa-
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40.16[1]
tion to its reinsurer is broader in treaty relationships as compared to facultative relationships. Cedents must arguably be more detailed in their disclosures because treaty reinsurers are unable to reject individual risks that fall within the class of risk covered by the treaty [see Barry R. Ostrager and Mary Kay Vyskocil, Modern Reinsurance Law and Practice 3.03[a] (2d ed. 2000); Steven W. Thomas, Utmost Good Faith in Reinsurance: A Tradition in Need of Adjustment, 41 Duke L.J. 1548, 1571 (June 1992)].
Cross References: For discussions of the doctrine of utmost good
faith and cases considering its application, see Mitchell L. Lathrop, Insurance Coverage for Environmental Claims 10.01[4], 10.05; Eric Mills Holmes, Appleman on Insurance 2d 105.5.
40.16 Consider Application of Duty of Utmost Good Faith Beyond Disclosure at Inception of Reinsurance Relationship. 40.16[1] Application of Duty of Utmost Good Faith to Parties Conduct During Life of Reinsurance Contract. The mutual duty of utmost good
faith extends to the parties actions during the entire course of the reinsurance relationship. For example, the cedents duty to disclose all material facts is not just relevant in the contract formation stage of the reinsurance relationship: [i]n fact, because the reinsurer places complete trust in the underwriting capability, claims-handling ability and general integrity of the reinsured, the reinsured owes the reinsurer the highest duty of fair dealing and utmost good faith throughout the reinsurance relationship [New York Insurance Law 15.02 (Walcott B. Dunham, Jr., ed.).
40.16[2] Application of Duty of Utmost Good Faith to Underwriting and Administration of Ongoing Business. The duty of utmost good faith
requires the cedent to act honestly and to follow all proper and businesslike steps in underwriting reinsured business and in settling claims [Am. Marine Ins. Group v. Neptunia Ins. Co., 775 F. Supp. 703, 705 (S.D.N.Y. 1991)]. Moreover, a cedents failure to act in good faith in handling or resolving claims may excuse the reinsurer from following the fortunes or settlements of the cedent [for a discussion of the follow the fortunes doctrine and the reinsurers preclusion from second-guessing the reinsureds good faith claims decisions, see 40.18 below]. Many courts considering what constitutes good faith in the context of a ceding insurers payment or settlement of claims have concluded that negligence alone cannot establish bad faith [Am. Bankers Ins. v. Nw. Natl Ins., 198 F.3d 1332, 1336 (11th Cir. 1999); Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1069 (2d 40-72
40.16[2]
Cir. 1993)]. Instead, the appropriate standard for bad faith in these circumstances is deliberate deception, gross negligence or recklessness [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d at 1069].
Example: A federal district court found that application of the
follow the settlements doctrine is subject to the requirement that the cedent conduct a reasonable, businesslike investigation before paying a claim. The cedents supercial investigation of claims stemming from implantation of a heart valve, failure to obtain technical advice as to whether injury occurred during the policy period, and failure to secure a legal opinion as to the appropriate trigger of coverage were grossly negligent and relieved the reinsurer of the duty to follow the settlements of the cedent [Suter v. Gen. Accident Ins. Co., 2006 U.S. Dist. LEXIS 48209, at *84-86 (D.N.J. 2006)].
Example: The Third Circuit Court of Appeals reversed the District
Courts nding that a ceding insurer breached its duty of good faith by agreeing to participate in the Wellington Agreement, which established an orderly mechanism for the application of insurance policies to underling asbestos-related bodily injury claims, and by failing to schedule the underlying policies according to the Agreement in order to avoid paying defense costs. The appellate court found that mere negligence could not support a violation of the duty, that none of the cedents actions amounted to gross negligence or recklessness and that the reinsurer did not prove that it had suffered the requisite separate economic injury (apart from its obligation to make payment under the reinsurance certicate) [N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1212-17 (3d Cir. 1995)].
Example: An appellate court directed the trial court on remand to
consider whether a cedent violated its duty to act in good faith by failing to disclose its increased use of intermediaries to produce non-system business that was ceded under the reinsurance treaties and by abandoning plans set forth in the placing documents to establish direct relationships with insurers [Compagnie de Reassurance DIle de France v. New England Reinsurance Corp., 57 F.3d 56, 79-82 (1st Cir. 1995)].
Example: Reinsurers sufficiently alleged claims for breach of
reinsurance contracts based on proven irregularities in the cedents underwriting [Intl Ins. Co. v. Certain Underwriters at 40-73
40.16[3]
Lloyds London, 1991 U.S. Dist. LEXIS 12948, at * 18, 36 (N.D. Ill. 1991)].
Example: An arbitration panel acknowledged that a cedent could
have handled claims better but concluded that the estimated savings that might have resulted from improved claims handling was relatively modest and well within the amount of slippage that would be expected under industry standards for average claims handling of a large book of workers compensation claims and ordered the reinsurer to pay the claims [Superior Natl Ins. Co. v. U.S. Life Ins. Co., No. 07-01458 (C.D. Cal. Feb. 18, 2007), reported in Mealeys Litigation Reports: Reinsurance, Vol. 17, No. 21 at 4].
Example: A federal District Court conrmed two arbitration
awards reducing the amount of reinsurers participations in treaties, where the cedent had made cessions to the treaties that were not of the type of business that it represented would be produced [Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., Ltd., 1988 U.S. Dist. LEXIS 6277, at *3-7 (E.D. Pa. June 28, 1988)].
40.16[3] Application of Duty of Utmost Good Faith to Obligation to Give Notice of Claim. Reinsurers rely on their cedents for the information
necessary to properly assess risks. Therefore, the duty of utmost good faith applies to the obligation of cedents to notify reinsurers of potential claims where the reinsurance contract so requires [Certain Underwriters at Lloyds London v. Home Ins. Co., 783 A.2d 238, 240 (N.H. 2001)]. In most states, a cedents failure to provide prompt notice of a claim entitles the reinsurer to refuse to perform only if the reinsurer was prejudiced by the untimely notice or where the cedent acted in bad faith [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1069 (2d Cir. 1993); Certain Underwriters at Lloyds London v. Home Ins. Co., 783 A.2d at 240-41; for a discussion of the ceding insurers notice obligations and late notice as a defense to payment of reinsurance obligations, see 40.09 above].
9 Bad Faith: Bad faith can be established by proof that the
reinsured acted in a grossly negligent or reckless manner in failing to implement practices and controls to ensure proper and timely notice of claims to the reinsurer [see Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d at 1069]. [I]f a ceding insurer has implemented routine practices and controls to ensure notication 40-74
40.16[4]
to reinsurers but inadvertence causes a lapse, the insurer has not acted in bad faith. But if a ceding insurer does not implement such practices and controls, then it has willfully disregarded the risk to reinsurers and is guilty of gross negligence. A reinsurer, dependent on its ceding insurer for information, should be able to expect at least this level of protection [id. at 1069-70].
Example: A reinsurer was relieved of its obligation to indemnify its reinsured where the reinsured failed to implement notication practices, procedures and controls, made no effort to determine what its duties were under the reinsurance agreement and failed to give timely notice of a signicant claim in violation of the agreements claims control clause [Certain Underwriters at Lloyds London v. Home Ins. Co., 783 A.2d at 240-42]. Example: A cedents untimely notice of loss to its facultative
reinsurers did not amount to bad faith where it had established a coordinated and coherent policy of dealing with [asbestos] claims, and the failure to provide notice to the facultative reinsurers was merely negligent [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d at 1070].
40.16[4] Application of Duty of Utmost Good Faith to Reinsurer to Pay Under Reinsurance Agreement. Most of the cases dealing with the
reinsurers duty of utmost good faith to its reinsured involve obligations to make payments under reinsurance agreements [Arkwright Mut. Ins. Co. v. Natl Union Fire Ins. Co. of Pittsburgh, Pa., 1995 U.S. Dist. LEXIS 11, at *14-15 (S.D.N.Y. 1995); Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49, 69-70 (D. Mass. 1998), affd, 217 F.3d 33 (1st Cir. 2000)]. Utmost good faith . . . requires a reinsurer to indemnify its cedent for losses that are even arguably within the scope of the coverage reinsured, and not to refuse to pay merely because there may be another reasonable interpretation of the parties obligations under which the reinsurer could avoid payment [United Fire & Cas. Co. v. Arkwright Mut. Ins. Co., 53 F. Supp. 2d 632, 642 (S.D.N.Y. 1999)].
Example: A reinsurer violated the duty of utmost good faith and
unfair claims practices law by adopting a moving target strategy of seeking to achieve a commutation of all of its obligations to the cedent by engaging in protracted delays in payment of the cedents claim. Among other things, the reinsurer raised constantly shifting defenses and objections to payment and 40-75
40.16[4]
unreasonably questioned the cedents settlement allocation [Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d at 64-65].
Example: A reinsurer may have acted in bad faith by exercising its contractual right to determine the amount of incurred loss in a manner designed to evade the spirit of the reinsurance contract and deny the cedent the benet of its bargain. Denial of the cedents bad faith claim was reversed, as the appellate court found that if the reinsurers selection of a particular method for calculating the amount of incurred loss was specically designed to trigger a contractual provision enabling the reinsurer to avoid its payment obligation it would have acted in bad faith [BJC Health Sys. v. Columbia Cas. Co., 478 F.3d 908, 914-16 (8th Cir. 2007)]. t Warning Reinsurers: Reinsurers may violate the duty of
utmost good faith in other circumstances. In one case, a reinsurer may have breached an implied term of the reinsurance contract when its attorneys disclosed condential information obtained from the ceding insurer by ling it in a court le accessible to the public without rst attempting to le it under seal. A federal district court refused to dismiss the cedents claim for breach of contract, stating that it may be able to prove that the customs and practices of the reinsurance industry include preservation of condences [Intl Ins. Co. v. Certain Underwriters at Lloyds London, 1991 U.S. Dist. LEXIS 12911, at *5-12 (N.D. Ill. 1991)].
Consider: One reason for the reinsurers duty to exercise utmost
good faith in its relationship with a cedent is the permission to examine the cedents records that is granted by the access to records provision of the reinsurance contract. The reinsurer is often granted intimate access to the inner workings of the cedent and accordingly has a higher duty to exercise good faith in its dealings with the reinsured.
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VII.
CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE SETTLEMENTS.
40.17 Understand Distinction Between Follow the Fortunes and Follow the Settlements. The duty of utmost good faith inherent in all reinsurance
relationships extends beyond contract placement and includes the claimshandling process [for a discussion of the duty of utmost good faith, see 40.15 and 40.16 above]. The parties continued good faith is manifested in the follow the fortunes and follow the settlements doctrines. Follow the fortunes and follow the settlements clauses have been interpreted to embody the principle that a reinsurer will indemnify its cedent for any losses arguably within the terms of the underlying policy, as long as the cedent has not acted in bad faith. The provisions operate primarily for the benet of cedents, allowing them some measure of certainty in calculating expected reinsurance recoveries and discouraging reinsurers from challenging a cedents coverage decisions and the amount of any settlement. If the follow the fortunes/settlements doctrine did not apply, there would be no reinsurance liability unless a claim was expressly covered under the direct policy. If the ceding insurer settled a coverage dispute and the reinsurer denied liability, the coverage case likely would have to be tried again. Although many U.S. court decisions fail to distinguish between following fortunes and following settlements [see, e.g., Natl Am. Ins. Co. of Cal. v. Certain Underwriters at Lloyds, London, 93 F.3d 529, 535 n.15 (9th Cir. 1996); N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199, 1205 (3d Cir. 1995); Houston Cas. Co. v. Lexington Ins. Co., 2006 U.S. Dist. LEXIS 45027, at *9 n.8 (S.D. Tex. June 15, 2006)], there is a meaningful distinction between the two concepts. As one court explained: [t]he follow the fortunes doctrine requires reinsurers to accept a reinsureds good faith decision that a particular loss is covered by the terms of the underlying policy, while the follow the settlements doctrine requires reinsurers to abide by a reinsureds good faith decision to settle, rather than litigate, claims on that policy [Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 9 F. Supp. 2d 49, 66 (D. Mass. 1998)]. The phrases are often used interchangeably, but the term follow the fortunes more accurately describes the reinsurers obligation to follow the reinsureds underwriting fortunes, whereas follow the settlements refers to the duty to follow the actions of the reinsured in adjusting and settling claims [N. River Ins. Co. v. Employers Reinsurance Corp., 197 F. Supp. 2d 972, 978 n.1 (S.D. Ohio 2002)]. 40-77
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t Warning: Although U.S. practice and case law tends to conate
follow the fortunes and follow the settlements clauses, counsel should not expect that other jurisdictions do not draw sharper distinctions between the two, especially English precedent which may govern reinsurance contracts or inform the thinking or approach of reinsurance arbitrators. The follow the fortunes doctrine requires the reinsurer to indemnify the cedent for all claims paid in good faith and reasonably within the coverage provided under the direct policy. The follow the fortunes obligation is broad, but a reinsurers liability is still limited to losses covered by the direct policy and not excluded by the reinsurance agreement. Follow the fortunes clauses do not override or alter express coverage limits in a reinsurance certicate, i.e., a follow the settlements provision does not require the reinsurer to indemnify for ex gratia payments. Under the follow the settlements doctrine, a reinsurer will be obligated to reimburse a cedent for a settlement or judgment paid by the cedent in good faith. The purpose of the follow the settlements doctrine is to prevent the reinsurer from second guessing the settlement decisions of the ceding company and from obtaining de novo review of judgments of the reinsureds liability to its insured [N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199 (3d Cir. 1995); Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1346 (S.D.N.Y. 1995)]. Absent exceptional circumstances, the ceding insurers interpretation and application of its policy to the underlying claim cannot be revisited by reinsurers or the courts. Ceding insurers that know their settlement decisions cannot be freely challenged have more incentive to settle with their insureds and avoid costly litigation. Some courts have found that the duty to follow the fortunes or settlements of a cedent can be implied in a reinsurance contract where a follow the fortunes or follows the settlements clause is not expressly included, based on the custom and practice of the reinsurance industry [see Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1349 (S.D.N.Y. 1995); Intl Surplus Lines Ins. Co. v. Certain Underwriters at Lloyds, London, 868 F. Supp. 917, 920 (S.D. Ohio 1994)]. Other courts, however, have refused to imply such a duty [see Am. Ins. Co. v. Am. Re-Insurance Co., 2006 U.S. Dist. LEXIS 95801, at *16-17 (N.D. Cal. 2006); N. River Ins. Co. v. Employers Reinsurance Corp., 197 F. Supp. 2d 972, 986 (S.D. Ohio 2002) (applying New Jersey law); cf. Affiliated F.M. Ins. Co. v. Employers Reinsurance Corp., 369 F. Supp. 2d 217, 227 (D.R.I. 2005)]. This issue has been hotly contested in recent litigation [see Am. Motorists Ins. Co. v. Am. Re-Insurance Co., 2007 U.S. Dist. LEXIS 41257 (N.D. Cal. 2007) (where 40-78
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cedent failed to produce evidence to support its claim that custom and practice in the reinsurance industry dictates that follow the settlements is implied in a reinsurance contract even absent an express provision to that effect, follow the settlements provision cannot be read into a certicate of facultative reinsurance contract as a matter of law)]. Follow the fortunes and settlement obligations also apply to a retrocessionaire in its agreements with a retrocedent [Am. Bankers Ins. Co. of Fla. v. Nw. Natl Ins. Co., 198 F.3d 1332 (11th Cir. 1999)]. Disputes frequently arise regarding the scope of the obligations of a reinsurer who has agreed to follow the fortunes or follow the settlements of a cedent. Although most disputes are resolved in reinsurance arbitrations, where the opinions are typically condential, several courts have published decisions considering this issue. [For examples of decisions involving reinsurers obligations under follow the fortunes or follow the settlement provisions, see 40.18 and 40.19 below].
Distinguish: Many facultative certicates include a follow the form provision, under which the reinsurer agrees to indemnify the cedent as if the reinsurance certicate adopted or incorporated the terms and conditions of the reinsured policy [for a discussion of follow the form clauses, see 40.12 above]. Follow the fortunes and follow the settlements clauses help dene the scope of the reinsurers indemnication obligation in terms of a specic loss, while a follow the form provision conrms that the reinsurers undertaking is in step with that of the cedent. As one court explained: Following form simply obliges the reinsurer to indemnify the ceding company fully within the scope of the reinsured risk when the claim falls within the scope of that risk as a matter of law (subject to exclusions explicitly delineated within the certicate of reinsurance); the follow the fortunes/settlements doctrine vests in the ceding company the right to decide what the scope of coverage actually is when the cedents policy is subject to more than one reasonable interpretation, and to make adjustments and settlements in conformity with its interpretation [Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1349 (S.D.N.Y. 1995)]. Cross References: For discussions of the follow the fortunes and follow the settlements doctrines and examples of typical clauses that embody these principles in reinsurance agreements, see Eric Mills Holmes, Appleman on Insurance 2d 106.2 and 102.5[D]; Business Insurance Law and Practice Guide 14.08[5]]. 40.18 Consider Reinsurers Preclusion from Second-Guessing Reinsureds Good Faith Claims Decisions. The follow the fortunes and follow the
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settlements doctrines preclude reinsurers from challenging cedents payments of claims and settlements that are reasonable and made in good faith.
9 Bad Faith: The burden of demonstrating bad faith is high. The
reinsurer must show that the cedent acted with gross negligence, recklessness or evident bad faith or demonstrate that the payment or settlement was not even arguably within the scope of the reinsurance coverage [Am. Bankers Ins. Co. of Fla. v. Nw. Natl Ins. Co., 198 F.3d 1332, 1335-36 (11th Cir. 1999); Mentor Ins. Co. (U.K.) v. Norges Brannkasse, 996 F.2d 506, 517 (2d Cir. 1993)]. Some courts have determined that the duty to act in good faith obligates cedents to be honest and businesslike in the claims settlement process [Am. Marine Ins. Group v. Neptunia Ins. Co., 775 F. Supp. 703, 709 (S.D.N.Y. 1991), affd, 961 F.2d 372 (2d Cir. 1992); Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1347 (S.D.N.Y. 1995)]. It is difficult for reinsurers to avoid following cedents fortunes or settlements by proving their decisions were not made in good faith. Courts and arbitrators typically require some element of intentional misconduct rather than inadvertent error.
Example: A reinsurer was found not liable to its reinsured for payment of its share of a settled claim, even though the reinsurance agreement contained a follow the settlements clause. The court concluded that the settled claims were not even arguably covered by the underlying policies and that the cedent had not conducted a reasonable, businesslike investigation before paying the claims [Karen L. Suter v. Gen. Accident Ins. Co. of Am., 2006 U.S. Dist. LEXIS 48209, at *82, 84-86 (D.N.J. 2006)]. Example: The Court of Appeals for the Eleventh Circuit found that a
reinsurer was obligated to follow the fortunes of a ceding insurer that made a good faith determination of coverage based on existing law, regardless of whether its decision was ultimately correct [Am. Bankers Ins. Co. of Fla. v. Nw. Natl Ins. Co., 198 F.3d 1332, 1336-37 (11th Cir. 1999)]. Because there was legitimate debate at the time of payment about whether a large group of similar claims constituted a single occurrence, the ceding insurers decision to pay those claims on an aggregate basis was not grossly negligent or reckless [id.].
Consider: Although courts have recognized limits on the scope of the
follow the fortunes and follow the settlements doctrines, the reinsurance industry largely measure their mutual relationships as if a 40-80
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particular contract included a broad follow the settlements clause. Most arbitration panels, heeding provisions in reinsurance contracts directing them to consider reinsurance agreements as honorable engagements, and not merely legal obligations, uphold these principles in reinsurance payment disputes. [For a discussion of honorable engagement language in reinsurance contracts, see 40.24 below].
40.19 Consider Application of Follow the Fortunes/Follow the Settlements to Allocation Decisions. One of the more common issues in reinsurance
coverage disputes is the extent to which the follow the fortunes/ settlements doctrine requires reinsurers to follow the cedents allocation and aggregation decisions in the case of settlements of its direct insurance obligations, viz., the allocation of loss to particular policy years and the aggregation of losses to satisfy minimum per-occurrence retentions or to disaggregate losses to multiply the available reinsurance policy limits. Allocation issues typically arise when insureds seek coverage for injuries to multiple parties or multiple properties under several policies spanning many years and the case is settled without a judicial determination as to how the losses should be allocated to particular policies. Cedents must determine how to allocate these losses among their underlying policies, which allocation in turn affects their reinsurers. This tension has arisen largely in the context of asbestos, product liability and environmental coverage cases. Reinsurers have often challenged cedents allocation decisions on the grounds they were incorrect or made only to maximize reinsurance recovery. Many courts have held that the follow the fortunes/ settlements doctrine applies to preclude reinsurers from avoiding liability, where the allocation decisions are made reasonably and in good faith as part of the settlement with the insured. In addition, some courts have regularly found that the follow the settlements doctrine extends to a cedents post-settlement allocation decisions, even if there is an inconsistency between the cedents allocation and its pre-settlement assessment of risk as long as the allocation was made in good faith and was reasonable [Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of Am., 419 F.3d 181, 188-91 (2d Cir. 2005); N. River Ins. Co. v. ACE Am. Reinsurance Co., 361 F.3d 134, 140-41 (2d Cir. 2004)]. Reinsurers will still be relieved from following cedents settlements if the allocation at the direct insurance level is trumped by the specic terms of the reinsurance contracts.
Example: A facultative reinsurer was bound to pay its share of the
direct insurers settlement of certain products liability claims under the certicates follow the fortunes clause. The court interpreted the 40-81
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follow the fortunes clause as having the same effect in the settlement context as would a follow the settlements clause. The court determined that the cedents allocation of the settled claims to the reinsured policy was at least arguably correct, and therefore . . . could not have been unreasonable [Natl Union Fire Ins. Co. v. Am. Re-Insurance Co., 441 F. Supp. 2d 646, 652 (S.D.N.Y. 2006)]. The court stated that the reinsurers challenges to the ceding companys allocation decisions invite exactly the type of inquiry [by the reinsurer and the court] that the follow-the-fortunes doctrine is intended to prevent, and that permitting reinsurers to second guess [the propriety of the cedents allocation] would . . .make settlement impossible and reinsurance in itself problematic [id., citing Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp., 419 F.3d 181, 189 (2d Cir. 2005)].
Example: The Second Circuit Court of Appeals held that a cedents post-settlement allocation must be deferred to under a follow-thefortunes clause, regardless of any pre-settlement position taken by the cedent, whether that position is articulated in a pre-settlement risk analysis or is implicit in the settlement with the underlying insured [Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of America, 419 F.3d 181, 188 (2d Cir. 2005)]. Granting summary judgment to the cedent on its claim for reinsurance payment, the court explained that a reinsurer seeking to avoid application of follow the fortunes must make an extraordinary showing of a disingenuous or dishonest failure [id. at 191] and that a cedent choosing among several reasonable allocation possibilities is surely not required to choose the allocation that minimizes its reinsurance recovery to avoid a nding of bad faith [id. at 193]. Example: A reinsurer disputed its cedents allocation of non-products asbestos claims that differed from its pre-settlement analysis. The Second Circuit Court of Appeals upheld the allocation, ruling that the follow the settlements doctrine obligated the reinsurer to indemnify the cedent for its share of the settlement as allocated by the cedent, regardless of whether there was an inconsistency between the allocation and the reinsureds pre-settlement assessment of risk, as long as the allocation met the typical follow the settlements requirements, i.e., was in good faith, reasonable and within the applicable policies [N. River Ins. Co. v. Ace Am. Reinsurance Co., 361 F.3d 134, 141 (2d Cir. 2004)]. The court explained that [r]equiring post-settlement allocation to match pre-settlement analyses would permit a reinsurer, and require the courts, to intensely scrutinize the specic factual information informing settlement negotiations and would undermine the
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certainty that the general application of the doctrine to settlement decisions creates [id.].
Example: The New York Court of Appeals rejected a cedents argument
that follow the fortunes clauses in reinsurance treaties permitted it to recover under a single occurrence theory, where the language of the treaties did not support such allocation [Travelers Cas. and Sur. Co. v. Certain Underwriters at Lloyds of London, 760 N.E.2d 319, 327-29 (N.Y. 2001)]. The court determined that the treaties denition of disaster and/or casualty as resulting from a series of accidents, occurrences and/or causative incidents incorporated spatial boundaries and precluded aggregation of environmental losses that occurred at various sites across the country [id. at 326-27]. The court emphasized that the follow the fortunes clause could not override the specic language of the reinsurance contracts [id. at 328].
Example: A federal district court denied a cedents motion for summary judgment on its claim for indemnity from its reinsurer premised on a follow the settlements provision in facultative certicates, where there were facts that could support the inference that the cedents conduct in allocating environmental liability to only one site was grossly negligent or reckless. The cedents classication of the settlement as a single occurrence, where there were claims from over 50 different sites, may have been motivated by its desire to maximize reinsurance recovery and was done without following the customary practice of consulting an environmental expert [Hartford Accident & Indem. Co. v. Columbia Cas. Co., 98 F. Supp. 2d 251, 258-60 (D. Conn. 2000)]. Example: The Appellate Division of the New York Supreme Court
reversed the trial courts grant of summary judgment to the cedent, which was premised on the follow the fortunes doctrine. During an insurance coverage dispute, the cedent took the position with its insured that damage allegedly sustained due to environmental pollution at various sites constituted multiple occurrences at each individual site. In a trial of one site at issue, the court found that one of the individual sites constituted seven occurrences. In the subsequent settlement of 16 additional sites, the cedent took the position that there were 95 occurrences in all; however, when it came time to cede its losses under facultative reinsurance agreements, the cedent took the position that each site constituted a single occurrence. Had the cedent billed the losses based on the same number of occurrences determined in the underlying coverage action, there would have been no reinsur40-83
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ance recovery because no single occurrence would have breached the reinsurance retention. The trial court granted the cedent summary judgment regardless of the inconsistency between the pre and post settlement allocation positions declaring that to do otherwise would require it to engage in an intrusive factual inquiry into the cedents settlement process. The Appellate Division reversed this decision nding that [a] reinsurer is not bound by the follow-the-fortunes doctrine where the reinsureds settlement allocation, at odds with its allocation of the loss with its insured, designed to minimize its loss, reects an effort to maximize unreasonably the amount of collectible reinsurance. Allstate Ins. Co. v. Am. Home Assurance Co., N.Y. Slip Op. 05170 (N.Y. App. Div., 1st Dept., June 12, 2007).
Consider: Most allocation disputes are decided in arbitration, rather
than litigation, and it is uncertain whether or to what extent court decisions on this issue are truly representative of industry practice or will be followed and applied in the arbitral arena.
z Strategic Point Cedents: The following factors may inuence what
allocation position a cedent should take in seeking indemnication from reinsurers: 1. Whether the positions taken by the cedent when negotiating or litigating with the insured are consistent with positions advanced by the company in the past; Whether an underlying allocation is consistent with applicable state law; If there is an environmental cession, whether the liability has been apportioned to the various underlying sites in proportion to estimates developed by environmental consultants with respect to damages attributable to the individual sites; Whether there are annualization of limits issues; Whether more than a single occurrence limit has been paid to the insured to settle the liability; Whether the settlement is a policy buy-back, and if so whether any of the settlement amount should be allocated to known and/or unknown future claims (or to bad faith).
2. 3.
4. 5. 6.
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VIII.
CONSIDERING BROKERED MARKET.
40.20 Brokered vs. Direct Market. Reinsurance companies are generally
known as either direct markets or brokered markets, depending on whether the reinsurers deal directly with their cedents or deal with them through an intermediary. Direct markets operate through salaried employees of ceding insurers and reinsurers who negotiate and bind reinsurance contracts. In brokered markets, reinsurers assume business by dealing with brokers or intermediaries. Whether the intermediary is the agent of the cedent or the reinsurer or is a dual agent is determined by an application of the facts to standard agency principles. Under typical fact patterns, although the intermediary commission is generally paid by the reinsurer, the intermediary is held to be the agent of the cedent [In re Pritchard & Baird, Inc., 8 B.R. 265 (D.N.J. 1980)]. Reinsurance brokers perform many of the same functions as brokers in the direct insurance market. Reinsurance brokers try to secure the most advantageous terms for ceding insurers from the reinsurance marketplace. A reinsurance broker or intermediary also may perform administrative functions during the operation of the reinsurance agreement. Reinsurance intermediaries often serve as a conduits for communications between cedents and reinsurers, transmit payments, collect sums due, settle losses and prepare periodic statements of account. Reinsurance brokers may have functions akin to claim handlers in the gathering of information, conveyance of attorney advice and the like concerning the submission of claims for indemnication. Additional responsibilities may include drafting reinsurance contract wording and creating complex reinsurance programs tailored to the ceding insurers specic needs.
z Strategic Point Cedent: Although a reinsurance intermediarys
duties may be limited by specic instructions from the ceding insurer, it is generally required to fulll its clients reinsurance needs with reasonable care. For example, there is case law which suggests that a reinsurance broker has a duty to determine whether the reinsurance company the broker is recommending is nancially solvent [Master Plumbers Ltd. Mut. Liab. Co. v. Cormany & Bird, Inc., 255 N.W.2d 533, 535-36 (Wis. 1977)]. This requirement exists as of the time the broker issues the policy [see Cherokee Ins. Co. v. E.W. Blanch Co., 66 F.3d 117, 123 (6th Cir. 1995)]. In analyzing potential liability, courts have stated that the broker must conduct a diligent inquiry that is consistent with industry standards [id.]. In addition, many states have enacted statutory schemes similar to the National Association of Insurance Commissioners (NAIC) Reinsurance Intermediary Model Act (NAIC 40-85
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Model Act), requiring special licensing for reinsurance intermediaries [see Cal. Ins. Code 1781.1 to 1781.13; 215 Ill. Comp. Stat. 100/1 to 100/60; N.Y. Ins. Law 2100 et seq.]. The NAIC Model Act is republished in full at Eric Mills Holmes, Appleman on Insurance 2d 104.3. In New York, regulations require intermediaries to inquire into the nancial status of unauthorized reinsurers, disclose any ndings to the cedent and provide a copy of the reinsurers most recent nancial statement [N.Y. Comp. Codes R. & Regs. tit. 11, 32.1(c); for a discussion of the regulation of reinsurance intermediaries in New York, see New York Insurance Law 15.04[3] (Walcott B. Dunham, Jr., ed.)].
z Strategic Point Cedents: A broker also can be liable for breach of an
obligation to procure reinsurance for an insurer [see Nw. Natl Ins. Co. v. Marsh & McLennan, 817 F. Supp. 1424, 1430-34 (E.D. Wis. 1993)]. Similarly, a reinsurance intermediary may be liable for failure to inform the cedent that reinsurance coverage was not obtained in full or in part or is inferior to that which was expected [see Commonwealth Ins. Co. v. Thomas A. Greene & Co., Inc., 709 F. Supp. 86, 88 (S.D.N.Y. 1989); La. Home Builders Assn Self-Insurers Fund v. Adjustco, Inc., 633 So. 2d 630, 635-36 (La. Ct. App. 1993)].
Cross Reference: For a discussion of direct and brokered reinsurance markets, see California Insurance Law & Practice 11.01. 40.21 Understand Which Entity Broker Represents. The issue often arises as
to whose agent the reinsurance broker or intermediary is with respect to a specic transaction. The general rule is that the broker or intermediary is the agent of the ceding company, unless there are facts demonstrating otherwise [Houston Cas. Co. v. Certain Underwriters at Lloyds London, 51 F. Supp. 2d 789, 799-800 (S.D. Tex. 1999); Banco Ficohsa v. Aseguradora Hondurena, S.A., 937 So. 2d 161, 165 (Fla. Dist. Ct. App. 2006)]. Under applicable state law principles of agency law, the specic conduct and relationship of the parties determines the nature and extent of agency status, and the most critical factor is control [St. Paul Fire and Marine Ins. Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS 8916, at *18-19 (S.D.N.Y. 1997)]. Where the broker or intermediary is found to be an agent of the cedent, the cedent may be responsible for the agents actions, including misrepresentations [see Houston Cas. Co. v. Certain Underwriters at Lloyds London, 51 F. Supp. 2d 789, 802-05 (S.D. Tex. 1999); Reliance Ins. Co. v. Certain Member Companies, 886 F. Supp. 1147, 1152-55 (S.D.N.Y. 1995); Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 638-39 (D. Neb. 1980)]. 40-86
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It is also possible for a reinsurance intermediary to be a dual agent [see Capitol Indem. Corp. v. Smith Intermediaries, Inc. 593 N.E.2d 872, 876 (Ill. App. Ct. 1992); Paul M. Hummer, Reinsurance Intermediaries: When Are They Liable and To Whom?, Mealeys Litigation Reports Commentary; Vol. 7, No. 10 (Sept. 25, 1996)].
Example: A reinsurance broker or intermediary may serve as the agent
for the reinsurer in order to receive or transmit money. In that case, payment of a premium to the ceding insurers agent is likely to constitute a valid premium payment on the reinsurance contract, whether or not the reinsurer knows of the payment [see ArkwrightBoston Mfrs. Mut. Ins. Co. v. Calvert Fire Ins. Co., 887 F.2d 437, 440 (2d Cir. 1989)]. That an intermediary functions as an agent for one party for part of the transaction, and the other party for a different part, does not mean that the intermediary is the agent of both for all purposes. Most reinsurance agreements include an intermediary clause that sets forth the intermediarys role in communications and its agency status in terms of receiving monies due between the parties. In most jurisdictions, a reinsurer will receive statutory credit for reinsurance only if the reinsurance agreement provides for the reinsurer to assume the credit risk of the intermediary (i.e., the reinsurer is not permitted to refuse to perform simply because the intermediary failed to transmit premium payments from the cedent). Therefore, reinsurance agreements involving intermediaries include an intermediary clause providing that the intermediary acts as the agent of the reinsurer, and not as the agent of the cedent, with respect to transmission of payments. [For a sample intermediary clause transferring the credit risk to the reinsurer, see 40.44 below.] On rare occasions, a non-signatory to the arbitration agreement such as a reinsurance intermediary may become a party to a reinsurance arbitration. [For a discussion of the inclusion of non-signatories in reinsurance arbitrations, see 40.22 below.] There are conicting decisions on whether pre-hearing discovery can be compelled from an intermediary that is not a party to a reinsurance arbitration, especially whether pre-hearing deposition examination is available. [For a discussion of discovery in reinsurance arbitrations, see 40.25 below.]
Example: Court found that there was no agency relationship between
a broker and a ceding insurer where the broker was not acting with the knowledge and consent or under the control of the ceding insurer [St. Paul Fire and Marine Ins. Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS 8916, at *14 (S.D.N.Y. 997)]. The court stated [a]lthough in most cases 40-87
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the primary insurer is the principal and the reinsurance broker its agent, the cases do not establish this relationship as a matter of law [id. at *5].
Example: An employee of the cedent who erroneously ceded a risk to
a treaty was acting as an agent of the ceding company and not of the reinsurers. The fact that the reinsurers knew of and were satised with his underwriting did not establish the element of control necessary to the agency relationship [Aetna v. Glens Falls, 453 F.2d 687, 690-91 (5th Cir. 1972)].
Example: A reinsurance treaty was rescinded because of misrepresentations by the intermediary, who was found to have been acting as the agent of the cedent [Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 633 (D. Neb. 1980)]. Example: A reinsurance broker was the ceding insurers agent, and its
misrepresentation of the underlying policys terms was made within the scope of its actual authority and voided the reinsurance policy [Houston Cas. Co. v. Certain Underwriters at Lloyds London, 51 F. Supp. 2d 789, 799-805 (S.D. Tex. 1999)].
Example: The insurer entered into a general agency agreement with a
company which was also an intermediary with Lloyds [Brougher Agency, Inc. v. United Home Life Ins. Co., 622 N.E.2d 1013, 1015 (Ind. Ct. App. 1993)]. This agent negotiated the purchase of reinsurance from Underwriters at Lloyds, London. In a reinsurance coverage dispute between the insurer and the Lloyds Underwriters, the insurer argued that the underwriters were bound by the agents statements about coverage during the placement process. An arbitration panel rejected this claim, determining that the agent had only ministerial authority relating to the reinsurance and no binding authority on behalf of Lloyds Underwriters. Because the agent was not authorized to act as the agent for Lloyds Underwriters, they could not be liable for any alleged fraud by the intermediary [id. at 1016-17].
Cross Reference: For a discussion of cases considering the agency status of reinsurance brokers and intermediaries, see Bertram Harnett, Responsibilities of Insurance Agents and Brokers 2.10[7].
40-88
IX.
CONSIDERING REINSURANCE ARBITRATION.
40.22 Consider Obligation to Arbitrate. Most reinsurance treaties include a
clause providing for resolution of disputes through arbitration, and U.S. courts strongly favor the enforcement of arbitration provisions. Even in the absence of an arbitration provision, the parties to a reinsurance contract may agree after the fact to arbitrate a particular dispute. One advantage of arbitration is that it enables parties to a reinsurance agreement to have their disputes adjudicated by a tribunal that is knowledgeable about the reinsurance industry; arbitrators may also be free to eschew delity to strict rules of law pursuant to honorable engagement clauses. The Federal Arbitration Act (FAA) [9 U.S.C. 1 et seq.], which applies to arbitrations arising from transactions that affect interstate or international commerce, is the primary source of arbitration law in the U.S. and enunciates a liberal policy in favor of arbitration [Argonaut Ins. Co. v. Travelers Ins. Co., 744 N.Y.S.2d 24, 25 (N.Y. App. Div. 2002); see also Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional de Venez., 991 F.2d 42, 45 (2d Cir. 1993)]. The FAA includes provisions concerning the following: compelling a party to arbitrate; staying litigation pending arbitration; appointing an arbitrator if the agreement does not so provide; submitting motions before courts; subpoenaing arbitration witnesses; and listing grounds and procedures for conrmation, vacatur, and modication of arbitral awards [9 U.S.C. 3-16]. Another body of law governing and favoring commercial arbitration in the U.S. is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) [9 U.S.C. 201-208], which applies to arbitrations arising from commercial transactions where at least one party is not a U.S. citizen or where the arbitration has some reasonable relation with one or more foreign states, even if all parties are U.S. citizens [9 U.S.C. 202]. State arbitration statutes, many of which are modeled after the Uniform Arbitration Act, generally apply to disputes that do not affect interstate or international commerce. When one party tries to avoid arbitrating a dispute, the other party may le a motion to compel arbitration (which is in its nature a request for specic performance of the arbitration clause). Whether a claim is arbitrable is a legal question for a court to decide, unless there is clear and unmistakable evidence that the parties have agreed to arbitrate arbitrability [First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944(1995), citing AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986); see also Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d 40-89
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Cir. 2005) (citation omitted)]. Although arbitration is favored by the courts, it will not be ordered unless the parties have agreed to arbitrate their dispute [Ace Capital Re: Overseas Ltd v. Central United Life Ins. Co., 307 F.3d 24, 29 (2d Cir. 2002)]. There must be clear and unmistakable evidence of an agreement to arbitrate [First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 947 (1995)], although most courts seem, as a practical matter, to rule in favor of arbitrability or to remand the question of arbitrability to arbitrators either way referring a particular matter to arbitration. In addition, the duty to arbitrate is limited by the scope of the particular arbitration clause to which the parties have agreed, so certain types of disputes, such as tortious interference or bad faith, might be found to be outside the scope of an arbitration clause governing contractual performance [Argonaut Ins. Co. v. Travelers Ins. Co., 744 N.Y.S.2d 24, 25 (N.Y. App. Div. 2002)]. The arbitration clause in a reinsurance contract typically sets forth the following: the types of disputes subject to arbitration; the initiation of the arbitration process; the process of selecting the arbitration panel and the qualications of arbitrators; the place and time of the arbitration hearing; the governing law; the procedures and timeframes to be followed in the arbitral process; and enforcement of the arbitration award. Arbitrations can be conducted under many different rules and in various fora. Some reinsurance arbitrations are conducted pursuant to procedures set forth by the following organizations:
The American Arbitration Organization; The International Chamber of Commerce; The Reinsurance Association of America; ARIAS-U.S.; The Insurance and Reinsurance Dispute Resolution Task Force; and The International Institute for Conict Prevention and Resolution.
The presumption favoring arbitrability of a particular dispute is strengthened when the language in the arbitration clause dening arbitrable disputes is broad [Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 27 (2d Cir. 1995)]. The following are examples of language included in arbitration clauses that have been viewed as broad and encompassing a variety of disputes beyond interpretation of the contract:
Any dispute, controversy or claim arising in connection with the performance or breach of the agreement; Any controversy, claim or dispute between the parties arising out 40-90
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of or relating in any way to the agreement;
Any dispute arising from the making, performance or termination of the contract; All claims and disputes of whatever nature arising under the contract; and Any dispute between the parties to the agreement over the terms of the agreement or any claim of breach by either of the parties.
Cross Reference: For an example of a broad arbitration clause in a reinsurance agreement, see 40.45 below.
In contrast, included below are examples of language in arbitration clauses that have been viewed as narrow, limiting arbitration to particular types of disputes:
All disputes or differences arising out of the interpretation of the agreement; Any matter involving the interpretation or application of the agreement; An irreconcilable difference of opinion as to the interpretation of the contract.
Parties are free to limit by agreement the claims they wish to arbitrate, requiring the federal policy favoring arbitration [to] yield to the parties agreement [Hartford Accident and Indem. Co. v. Swiss Reinsurance Am. Corp., 246 F.3d 219, 223 (2d Cir. 2001) (citation omitted); see also Ace Capital Re: Overseas Ltd v. Central United Life Ins. Co., 307 F.3d 24, 29 (2d Cir. 2002)]. In determining whether a particular dispute is arbitrable, courts typically engage in a two-part inquiry: whether there is an agreement to arbitrate and, if so, whether the scope of the agreement encompasses the asserted claims [Hartford Accident and Indem. Co. v. Swiss Reinsurance America Corp., 246 F.3d 219, 226 (2d Cir. 2001) (citation omitted)]. [A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration [Moses H. Cone Meml Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)]. Therefore, a court should compel arbitration unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute [David L. Threlkeld & Co., Inc. v. Metallgesellschaft Ltd., 923 F.2d 245, 250 (2d Cir. 1991) (citations omitted)]. In determining whether a particular claim falls within the scope of an arbitration agreement, courts focus on the factual allegations rather than the legal claims asserted. If the allegations under40-91
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lying the claims touch matters covered by the parties contract, then those claims are arbitrable [see Mitsubishi Motors Corp. v. Soler ChryslerPlymouth Inc., 473 U.S. 614, 625 n.13 (1985); Genesco, Inc. v. Kakiuchi & Co., Ltd., 815 F.2d 840 (2d Cir. 1987)]. Appellate courts review decisions to compel arbitration de novo [Sphere Drake Ins. Ltd. v. Clarendon Natl Ins. Co., 263 F.3d 26, 29 (2d Cir. 2001)], but such review may not be available on an interlocutory basis. Courts can sever arbitrable claims from nonarbitrable claims. When a court determines that only some claims are arbitrable, it must decide whether to stay litigation of the remaining claims pending arbitration or to let them proceed concurrently [JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 169 (2d Cir. 2004) (citation omitted); Benson v. Lehman Bros., Inc., 2005 U.S. Dist. LEXIS 8542, at *4-5 (S.D.N.Y. May 9, 2005) (citation omitted)]. [For a discussion of when courts stay litigation pending arbitration, see New York Insurance Law, 15.08[2] (Walcott B. Dunham, Jr., ed.).] If factual questions on which the non-arbitrable claim turns may be resolved in the arbitration, courts typically stay the non-arbitrable claim. Absent a contract provision to the contrary, questions of mere delay, laches and untimeliness raised to defeat arbitration are generally issues of procedural arbitrability reserved for resolution by the arbitrator [Glass v. Kidder, Peabody & Co., Inc., 114 F.3d 446, 454-56 (4th Cir. 1997); All Am. Termite & Pest Control, Inc. v. Albert Bedford Walker, 830 So. 2d 736, 739 (Ala. 2002); Amtower v. William C. Roney & Co., 590 N.W.2d 580, 583 (Mich. Ct. App. 1998); but see In the Manner of Donaldson Acoustics, Inc. v. N.Y. Inst. of Tech., 671 N.Y.S.2d 114, 115 (N.Y. Sup. Ct. 1998)]. Another issue that most courts have found to be within the purview of the arbitration panel, unless the parties agreement provides otherwise, is whether or not arbitrable disputes can be consolidated, that is, whether arbitration under separate contracts can be resolved in a single proceeding [Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 581 (7th Cir. 2006); Shaws Supermarkets, Inc. v. United Food & Commercial Workers Union, 321 F.3d 251, 254-55 (1st Cir. 2003); Markel Intl Ins. Co. v. Westchester Fire Ins. Co., 442 F. Supp. 2d 200, 203-05 (D.N.J. 2006), affd Certain Underwriters at Lloyds London. v. Westchester Fire Ins. Co., 2007 U.S. App. LEXIS 13714 (3d Cir. 2007)].
z Strategic Point Consolidation of Arbitrations: There are potential
advantages and disadvantages posed by the consolidation of arbitration proceedings. On the one hand, consolidation may prevent inconsistent and conicting decisions, provide arbitrators with a more complete understanding of the issues involved in the disputes and 40-92
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promote more efficient and cost-effective dispute resolution. On the other hand, consolidation may be more costly for a party only peripherally involved in a series of complex disputes, may create a risk that the panels decision will be tainted by facts irrelevant to a particular dispute and may raise additional condentiality concerns. It also may be difficult to restructure an arbitration proceeding to accommodate the rights of additional parties or related disputes. Thus, contracting parties should carefully consider whether or not to include consolidation and joinder provisions in their arbitration agreements or to request consolidation once arbitration has commenced. Parties seeking consolidation should approach their arbitration panel quickly to ensure that the decision regarding consolidation will be made by the panel they chose, and not a panel adjudicating another dispute. Some parties have argued that inclusion of a service of suit clause in a reinsurance agreement conicts with an arbitration clause in the same agreement and indicates that the parties did not intend all issues to be arbitrable. Most courts have harmonized these clauses, however, by assuming that the parties did not intend to eviscerate the arbitration clause through the service of suit clause [see Montauk Oil Transp. Corp. v. Steamship Mut. Underwriting Assn (Bermuda), 79 F.3d 295, 298 (2d Cir. 1996); Ochsner/Sisters of Charity Health Plan, Inc. v. Certain Underwriters at Lloyds, London, 1996 U.S. Dist. LEXIS 12561, at *5-7 (E.D. La. Aug. 30, 1996); W. Shore Pipe Line Co. v. Associated Elec & Gas Ins. Servs., Ltd., 791 F. Supp. 200, 204 (N.D. Ill. 1992)]. Courts have found that the service of suit clause is intended to provide jurisdiction over a foreign party, and where it co-exists with an arbitration clause, its purpose is to permit enforcement of an arbitration decision or to allow a petition to compel arbitration to be adjudicated in a particular court [W. Shore Pipe Line Co. v. Associated Elec. & Gas Ins. Servs., Ltd., 791 F. Supp. 200, 204 (N.D. Ill. 1992)]. The arbitration clause is also the starting point for a determination of the remedies that can be imposed by an arbitral panel. [S]ubject to the terms of the empowering clause, arbitrators possess latitude in crafting remedies as wide as that which they possess in deciding cases [Advest, Inc. v. McCarthy, 914 F.2d 6, 10-11 (1st Cir. 1990)], including equitable remedies such as pre-judgment attachment or security. Consistent with the federal policy favoring arbitration, courts have been reluctant to nd that an arbitrator exceeded his authority in ordering relief, where the arbitration agreement does not specically restrict the arbitrators authority [Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 831 (9th Cir. 1995); Rhone-Poulenc, Inc. v. Gould Elecs., Inc., 1998 U.S. Dist. LEXIS 15848, at *7 (N.D. Cal. Oct. 6, 1998)]. For example, under a broadly worded arbitration 40-93
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clause, arbitrators are empowered to reform a contract [Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir. 1989); Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832-33 (9th Cir. 1995)]. Assuming the arbitration clause is broad enough, arbitrators also can grant rescission of a reinsurance contract (in part because arbitration clauses are generally thought to be separable from the underlying contract) [Ace Capital Re Overseas Ltd. v. Central United Life Ins. Co., 307 F.3d 24, 26, 33 (2d Cir. 2002)]. In some circumstances, arbitrators can award temporary equitable relief where necessary to ensure that the nal award is meaningful [Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 935 F.2d 1019, 1022-23, 1026 (9th Cir. 1991); British Ins. Co. of Cayman v. Water St. Ins. Co., 93 F. Supp. 2d 506, 516 (S.D.N.Y. 2000); but see Recyclers Ins. Group v. Ins. Co. of N. Am., 1992 U.S. Dist. LEXIS 8731, at *14 (E.D. Pa. 1992]. Arbitrators also generally are empowered to award prejudgment interest [Rhone-Poulenc, Inc. v. Gould Elecs., Inc., 1998 U.S. Dist. LEXIS 15848, at *7-8 (N.D. Cal. 1998); J.A. Jones Constr. Co. v. Flakt, Inc., 731 F. Supp. 1061, 1064 (N.D. Ga. 1990)]. Courts also may look to the parties submissions of the issues to the arbitrators to determine the scope of the arbitrators power to grant relief [Trade & Transp., Inc. v. Natural Petroleum Charterers, Inc., 931 F.2d 191, 195 (2d Cir. 1991); Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir. 1989)]. Further, the power to grant relief may not be limited by the scope of the parties agreement, if the background rules governing the arbitration provide broad equity powers [see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991); Brown v. Coleman Co., 220 F.3d 1180, 1183 (10th Cir. 2000)]. The attempted inclusion of non-signatories to the arbitration agreement in an arbitration proceeding is frequently a subject of dispute. Because arbitration is a contractual right, non-signatories to an arbitration agreement generally may not be bound to, nor able to, enforce an agreement to arbitrate [Mut. Benet Life Ins. Co. v. Zimmerman, 783 F. Supp. 853, 865-67 (D.N.J. 1992)]. However, in certain circumstances, a non-signatory may force a signatory to an arbitration agreement to submit to an arbitration with the non-signatory under principles of contract, agency and estoppel [see Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 838-41 (7th Cir. 1981); Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 957 F. Supp. 839, 841-42 (S.D. Miss. 1997); Contl Cas. Co. v. Certain Underwriters at Lloyds London, 2004 U.S. Dist. LEXIS 4060, at *13-14 (S.D.N.Y. 2004)]. In addition, non-signatories to an arbitration agreement may be bound to arbitrate pursuant to several legal doctrines, including: assumption; agency; estoppel; veil piercing; and incorporation by reference [Intl Paper Co. v. Schwabedissen Maschinen & Anlagen 40-94
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GMBH, 206 F.2d 411, 416-18 (4th Cir. 2000); Thomson-CSF, S.A. v. Am. Arbitration Assn, 64 F.3d 773, 776 (2d Cir. 1995); but see Grundstad v. Ritt, 106 F.3d 201, 204-05 (7th Cir. 1997)]. The right to arbitrate a dispute may be waived if a party fails to comply with the terms of the arbitration agreement, excessively delays commencing arbitration or takes action that is inconsistent with the arbitral process [see Gen. Star Natl Ins. Co. v. Administratia Asigurarilor De Stat, 289 F.3d 434, 438 (6th Cir. 2002); Menorah Ins. Co. v. INX Reinsurance Corp., 72 F.3d 218, 221-22 (1st Cir. 1995); Kramer v. Hammond, 943 F.2d 176, 179-80 (2d Cir. 1991)]. If a party waits while a matter is being litigated to assert a right to arbitrate, the court may nd it to be estopped from asserting the arbitration clause if the litigation has proceeded substantially.
Example: Some courts have found that inclusion of the phrase arbi-
tration clause in an executed placement slip or cover note constitutes evidence of a binding agreement to arbitrate [Zurich Am. Ins. Co. v. Cebcor Serv. Corp., 2003 U.S. Dist. LEXIS 10346, at *6-11 (N.D. Ill. 2003); Guarantee Trust Life Ins. Co. v. Am. United Life Ins. Co., 2003 U.S. Dist. LEXIS 22777, at *7-8 (N.D. Ill. Dec. 18, 2003) (applying Pennsylvania law); but see Frank B. Hall Co. of Colo. v. Colo. Sch. Dists. Self-Insurance Pool, No. 92 CV 225 (Colo. Dist. Ct., City and Co. of Denver Mar. 26, 1997), reported in Mealeys Litigation Reports: Reinsurance, Vol. 3, No. 24 at D].
Example: A narrow arbitration clause applying only to irreconcilable
differences of opinion that concern the interpretation of facultative certicates did not encompass a claim that the certicates were void ab initio because of the cedents failure to disclose asbestos litigation [Gerling Global Reinsurance Co. v. Ace Prop. & Cas. Ins. Co., 2002 U.S. App. LEXIS 15571, at *5-7 (2d Cir. Aug. 1, 2002) (unpublished opinion)].
Example: A reinsurer sued to rescind a reinsurance contract based on
non-disclosures in the underwriting process. The federal district court found that the arbitration clause covering [a]ll disputes or differences arising out of the interpretation of this Agreement was too narrow to encompass claims for rescission based on misrepresentation and refused to stay those claims in favor of arbitration [Farm Bureau Mut. Ins. Co. v. Am. Intl Group, Inc., 2003 U.S. Dist. LEXIS 14463, at *11-12 (S.D. Iowa 2004)].
Example: Under an arbitration clause providing that any dispute or difference of opinion hereafter arising with respect to this Contract . . .
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shall be submitted to arbitration, the issue of a mutually agreeable location for the underlying dispute is arbitrable [Trustmark Ins. Co. v. Fire & Cas. Ins. Co. of Conn., 2002 U.S. Dist. LEXIS 7923, at *6-7 (N.D. Ill. 2002)].
t Warning: A Missouri arbitration statute has been interpreted by a
federal district court to preclude the enforcement of arbitration clauses in insurance and reinsurance agreements [Transit Cas. Co. v. Certain Underwriters at Lloyds of London, 1996 U.S. Dist. LEXIS 22710, at *5-8 (W.D. Mo. 1996), citing Mo. Rev. Stat. 435.350 (as then existing)].
Examples Non-signatories: A non-signatory to arbitration agreements
was compelled to arbitrate disputes with a signatory of the agreements because the guaranty signed by the non-signatory incorporated the agreements and the arbitration provisions of the agreements were sufficiently broad to bind non-signatories [Clarendon Natl Ins. Co. v. Lan, 152 F. Supp. 2d 506, 519-521 (S.D.N.Y. 2001)]. A reinsured party not specically named in an excess of loss reinsurance agreement was permitted to compel arbitration against the signatory reinsurer under the agreements arbitration clause as a third-party beneciary of the agreement [Contl Cas. Co. v. Certain Underwriters at Lloyds London, 2004 U.S. Dist. LEXIS 4060, at *13-14 (S.D.N.Y. 2004)]. A reinsurance intermediary that was not a signatory to reinsurance and retrocession agreements containing arbitration clauses was nonetheless compelled to arbitrate a dispute concerning a reinsurers obligations under those agreements. The court found that the intermediary was estopped from refusing to arbitration because of its allegations that it suffered harm due to the reinsurers repudiation of the contracts and because the intermediary received a direct benet from the agreements [Intl Ins. Agency Services, LLC v. Revios Reinsurance U.S., Inc., 2007 U.S. Dist. LEXIS 22229, at *14-19 (N.D. Ill. 2007)].
Cross References: For discussions of whether an insolvent companys
liquidator or receiver is bound by an agreement to arbitrate, see New York Insurance Law 15.08[4] (Walcott B. Dunham, Jr., ed.); Eric Mills Holmes, Appleman on Insurance 2d 107.2[F].
Lexis.com Search: To nd a general discussion of arbitration in the
reinsurance law context, try this source: Reinsurance Law. Using the Table of Contents, navigate to Chapter 6 Arbitration.
40.23 Neutral Panel or Party Advocate System. Arbitration agreements
typically include provisions stipulating the number of arbitrators and their qualications, the timing and method by which the panel is to be 40-96
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selected and whether one arbitrator is to act as an umpire or chairman of the panel. Some agreements do not specically list these procedures, but instead incorporate the rules of an arbitration organization containing such procedures. If the agreement is completely silent on the method for selecting arbitrators, or if the parties fail to avail themselves of the procedures agreed upon for selecting arbitrators, a court is authorized under the Federal Arbitration Act (FAA) to appoint any one or all of the arbitrators upon application of a party [9 U.S.C. 5; see also Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 814 F.2d 1324, 1327-29 (9th Cir. 1987); AIG Global Trade and Political Risk Ins. Co. v. Odyssey Am. Reinsurance Corp., 2006 U.S. Dist. LEXIS 73258, at *15-17 (S.D.N.Y. 2006)]. In arbitrations conducted pursuant to reinsurance agreements, the tribunal is usually composed of three arbitrators. Reinsurance arbitration agreements typically provide that each side is to designate its own party arbitrator, and then the two designated party arbitrators are to appoint a third neutral arbitrator, usually called an umpire. Some agreements also include a default mechanism for selection of the neutral arbitrator that operates when the parties or party arbitrators (where vested with the decision to elect a third, neutral umpire) cannot agree on umpire selection. In some instances, parties request the organization administering the arbitration to appoint the umpire. Unless set forth in the contract, the arbitrators need not meet any particular requirements beyond capably performing their task. Arbitration clauses in reinsurance agreements, however, usually set forth objective qualications for arbitrators and umpires. Most arbitrators are required to have some level of expertise in the reinsurance or insurance industry or to be a present or former officer or director of an insurance or reinsurance company. In the United States, party-appointed arbitrators may be nonneutral and predisposed towards the party that appointed them, unless the parties or the contract species otherwise [Lozano v. Md. Cas. Co., 850 F.2d 1470, 1472 (11th Cir. 1988); Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 679 (7th Cir. 1983); Astoria Med. Group v. Health Ins. Plan of Greater N.Y., 182 N.E.2d 85, 87-89 (N.Y. 1962)]. Although party-appointed arbitrators may have a general predisposition or sympathy with a party or its position, this is more in the nature of a duty to give the party appointing them a fair hearing; party-appointed arbitrators are not surrogates for the party and still must make independent judgments and act fairly [Universal Reinsurance Corp. v. Allstate Ins. Co., 16 F.3d 125, 129 n.2 (7th Cir. 1994); Metro. Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co., 780 F. Supp. 885, 892 (D. Conn. 1991)]. (There also may be more latitude in discussing the merits of the dispute with a party-appointed arbitrator until the umpire is selected.) In contrast, umpires are expected to remain 40-97
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completely neutral. Both neutral and non-neutral members of the panel must participate in the arbitration process in a fair, honest and good faith manner and may not exhibit evident partiality or corruption [9 U.S.C. 10(a)(2); Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 644-49 (6th Cir. 2005); Scott v. Prudential Sec., 141 F.3d 1007, 1015 (11th Cir. 1998)]. Arbitrators must disclose to the parties any potentially disqualifying interests or relationships [Commonwealth Coatings Corp. v. Contl Cas. Co., 393 U.S. 145, 147-49 (1968); see also U.S. Wrestling Fedn v. Wrestling Div. of AAU, Inc., 605 F.2d 313, 319 (7th Cir. 1979)]. Failure to disclose business or nancial relationships that would create an objectively reasonable impression of bias could result in vacation of the award [Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th Cir. 2002); Nw. Natl Ins. Co. v. Allstate Ins. Co., 832 F. Supp. 1280, 1286-87 (E.D. Wis. 1993); Barcon Assocs., Inc. v. Tri-County Asphalt Corp., 430 A.2d 214, 218-21 (N.J. 1981); for a discussion of the circumstances under which arbitral awards may be vacated, see 40.28 below]. Court challenges to an arbitrators qualications to serve can only be raised after issuance of the award, except in limited circumstances [Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 489-90 (5th Cir. 2002); Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892, 895-96 (2d Cir. 1997); Ins. Co. of N. Am. v. Pennant Ins. Co., Ltd., 1998 U.S. Dist. Lexis 2466, at *5-7 (E.D. Pa. 1998)]. Some courts have recognized that arbitrators can be disqualied prior to rendition of an award, based on courts inherent powers or on general contract principles [see Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892, 895-96 (2d Cir. 1997); First State Ins. Co. v. Employers Ins. of Wausau, No. 99-12478-RWZ (D. Mass. Feb. 23, 2000), reported in Mealeys Litig. Report: Reinsurance, Vol. 10, No. 21 (Mar. 9, 2000) at C-1; Evanston Ins. Co. v. Kansa Gen. Intl Ins. Co., Ltd., No. 94 C 4957 (N.D. Ill. Oct. 17, 1994), reported in Mealeys Litig. Report: Reinsurance, Vol. 5, No. 14 (Nov. 23, 1994) at A-1].
t Warning: Many arbitration agreements include a provision, some-
times called an adverse selection clause, stating that if a party fails to appoint an arbitrator within a specied time following receipt of a written request to designate an arbitrator, the other party may appoint both party-appointed arbitrators. Section 5 of the FAA requires that the parties follow the contractually specied method for appointing arbitrators [9 U.S.C. 5]. Parties should carefully observe any timetable or procedures set forth in their contracts for selecting arbitrators to avoid forfeiting the right to appointment [see Universal Reinsurance Corp. v. Allstate Ins. Co., 16 F.3d 125, 128-29 (7th Cir. 1994); Evanston Ins. Co. v. Gerling Global Reinsurance Corp., 1990 U.S. Dist. LEXIS 40-98
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12521, at *7-8 (N.D. Ill. 1990); Employers Ins. of Wausau v. Jackson, 527 N.W.2d 681, 688-89 (Wis. 1995)]. Some courts have been reluctant, however, to nd that a party making an untimely selection forfeited its appointment right, unless the parties expressly made time of the essence in the contracts arbitration provision [see Ancon Ins. Co. (U.K.) v. GE Reinsurance Corp., 2007 U.S. Dist. LEXIS 24822, at *23-24 (D. Kan. 2007); RLI Ins. Co. v. Kansa Reinsurance Co., 1991 U.S. Dist. LEXIS 16388, at *9 (S.D.N.Y. 1991); New England Reinsurance Corp. v. Tenn. Ins. Co., 780 F. Supp. 73, 77-78 (D. Mass. 1991)].
Cross Reference: For an example of an adverse selection clause in a facultative certicate, see California Insurance Law and Practice 11.07[2][c]. Cross Reference: For a survey and discussion of the standards for selection of party-appointed arbitrators that are set forth in the major private international arbitration rules, see Doak Bishop and Lucy Reed, Practical Guidelines for Interviewing, Selecting and Challenging PartyAppointed Arbitrators in International Commercial Arbitration, in Arbitration International, Vol. 14, No. 4 (LCIA 1998) at 395. Cross References: Many arbitration agencies maintain lists of qualied individuals from which parties can select arbitrators. For example, ARIAS-U.S. publishes a list of certied reinsurance arbitrators and umpires [see www.arias-us.org]. The American Arbitration Association also maintains a roster of prospective arbitrators and mediators experienced in various industries [see www.adr.org]. z Strategic Point: Considerable care should be taken in appointing a
party arbitrator who is fair and knowledgeable. The party arbitrator should understand the issues well and be able to articulate a coherent view of the case. It is helpful if the arbitrator has sufficient standing in the industry to inuence other panel members or at least not to be intimidated by other arbitrators with more experience or better credentials Umpires ideally should have industry knowledge as well arbitration experience.
z Strategic Point: The parties can dispense with some of the back and
forth in the appointment of arbitrators and umpires by agreeing to a process or a joint list of candidates at the time their dispute ripens.
Cross Reference: The Code of Ethics for Arbitrators in Commercial Disputes, prepared by a joint committee of the American Arbitration
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Association (AAA) and the American Bar Association (ABA), sets forth generally accepted standards of ethical conduct for the guidance of arbitrators and parties. The current (2004) version is available on the American Bar Association website, at ww.abanet.org/dispute/ commercial_disputes.pdf.
Cross Reference: For a sample questionnaire for prospective umpires,
see 40.47 below.

Cross Reference: The ARIAS-U.S. Umpire Appointment Procedure is available on its website at www.arias-us.org. In addition, the Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes, drafted by the Insurance and Reinsurance Dispute Resolution Task Force, include a procedure for the selection of an all-neutral arbitration panel [see Procedures at www.ArbitrationTaskForce.org]. 40.24 Strict Rule of Law vs. Obligations Pursuant to Honorable Engagement.
Most reinsurance agreements include an honorable engagement clause which typically instructs arbitrators to interpret the contract as an honorable engagement and not merely as a legal obligation, and relieves arbitrators from following the strict rules of law [for a sample arbitration provision containing typical honorable engagement language, see 40.46 below]. This language reects the overriding commercial practicality inherent in reinsurance relationships and embodies the mutual duty of utmost good faith. [For a discussion of the duty of utmost good faith in reinsurance relationships, see 40.15 and 40.16 above]. Honorable engagement clauses can allow arbitrators to nd a resolution that best reects the purpose and intent behind the transaction at issue. An honorable engagement clause, however, does not necessarily supplant the obligation of the panel formally to issue a statement of reasons for the decision they reach, which is a separate issue. Language relieving arbitrators from following strict rules of law permits arbitrators to apply principles of fairness, equity and commercial practice in resolving reinsurance disputes. Courts have read honorable engagement clauses generously, consistently nding that arbitrators have wide discretion to order remedies they deem appropriate [Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 261 (2d Cir. 2003); see also Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 935 F.2d 1019, 1025 (9th Cir. 1991); Certain Underwriters at Lloyds v. Argonaut Ins. Co., 264 F. Supp. 2d 926, 939 (N.D. Cal. 2003)]. Arbitrators may be persuaded by relevant case law, but, as a general matter, are not required to resolve matters based on how they believe a court would decide the issue, which also reects that the qualications clause in the arbitration 40-100
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agreement often does not require that the arbitrators be trained in the law [see U.S. Life Ins. Co. v. Ins. Commr of the State of Cal., 2005 U.S. App. LEXIS 25763, at *7-8 (9th Cir. 2005) (unpublished decision); Nw. Natl Ins. Co. v. Generali Mex. Compania De Seguros, S.A., 2000 U.S. Dist. LEXIS 7348, at *4 (S.D.N.Y. 2000); Employers Ins. of Wausau v. Certain Underwriters at Lloyds London, 552 N.W.2d 420, 427 n.8 (Wis. Ct. App. 1996); for a discussion of the rare circumstances under which arbitral awards may be vacated under the manifest disregard of the law standard, see 40.28 below]. Instead, they may, and often do, apply industry custom and practice as well as equitable principles to reach their decisions. Unless the contract provides otherwise, arbitrators in U.S. arbitrations are not obligated to issue a reasoned decision explaining the award. [For a discussion of reasoned awards in reinsurance arbitrations, see 40.27 below].
Example: Contract language permitting the arbitrators to consider
this contract an honorable engagement rather than merely a legal obligation and absolving the arbitrators from following the strict rules of law was broad enough to give the arbitrators the power to determine the preclusive effect of a prior arbitration award [N. River Ins. Co. v. Allstate Ins. Co., 866 F. Supp. 123, 129 (S.D.N.Y. 1994)].
Example: The court determined that a reinsurance treaty relieving
arbitrators of all judicial formalities and providing that they may abstain from following strict rules of law empowered the arbitrators to award relief in any reasonable form or at any stage in the proceeding, including ordering a party to post additional pre-hearing security [Meadows Indem. Co., Ltd. v. Arkwright Mut. Ins. Co., 1996 U.S. Dist. LEXIS 14318, at *12-13 (E.D. Pa. 1996)].
40.25 Discovery in Arbitration. The broad and liberal rules governing
pretrial discovery in state and federal civil cases generally do not apply in arbitrations, unless the parties so agree or the panel so orders. The nature and extent of discovery available in reinsurance arbitrations varies widely, depending upon the nature of the case, the arbiters views on the issue, and the particular rules governing the arbitration. Document discovery is almost universally permitted in arbitration; however, the amount of document discovery can differ signicantly. Some arbiters will allow discovery only on the specic claims and reinsurance contracts at issue in the arbitration, while others essentially will permit the parties to request any documents they wish. In addition, some arbiters will allow depositions, while others will not (especially from third parties). Although arbitration clauses often do not address the arbitrators author40-101
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ity to resolve discovery disputes, it is commonly recognized that arbitrators have the authority to resolve procedural disputes, including the scope and nature of permissible discovery. As can be expected, the parties often raise privilege and other production disputes during the discovery process. These disputes typically are resolved by means of letter briefs to the panel or a conference call with the umpire. Occasionally, the panel will hold a hearing with counsel to resolve a discovery dispute. Under Section 7 of the Federal Arbitration Act (FAA) [9 U.S.C. 7], and the laws of most states, arbitrators have broad power to issue subpoenas and subpoenas duces tecum, if the evidence sought for the hearing is material to the proceedings. The FAA does not, however, specically address the arbitrators power to require non-parties to submit to prehearing discovery. As a result, case law is split as to whether arbitrators have the authority to order pre-hearing discovery of non-parties, particulary pre-hearing deposition discovery. The Fourth Circuit Court of Appeals has held that arbitrators powers should be limited to those specically set forth in the FAA; therefore, pre-hearing discovery of non-parties is prohibited unless a party demonstrates a special need [see Comsat Corp. v. Natl Science Found., 190 F.3d 269, 274-76 (4th Cir. 1999); Application of Deiulemar Compagnia Di Navigazione S.P.A. v. M/V Allegra, 198 F.3d 473, 480-81 (4th Cir. 1999)]. In contrast, the Eighth Circuit Court of Appeals and several federal district courts have held that implicit in an arbitration panels power to subpoena relevant documents for production at a hearing is the power to order the production of documents prior to the hearing [see In re Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir. 2000); In re Arbitration between Douglas Brazell v. Am. Color Graphics, Inc., 2000 U.S. Dist. LEXIS 4482, at *4-9 (S.D.N.Y. 2000); Amgen Inc. v. Kidney Ctr. of Delaware County, Ltd., 879 F. Supp. 878, 880 (N.D. Ill. 1995)]. The Third Circuit Court of Appeals has determined that the text of the FAA limits the subpoena power of arbitrators to compelling production of documents by non-parties only at an actual arbitration hearing [Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 2004)]. In one case, the court approved a special purpose hearing for non-parties to respond to arbitral subpoenas, reasoning that [n]othing in the language of the FAA limits the point in time in the arbitration process when [the subpoena] power can be invoked or says that the arbitrators may only invoke this power under section 7 at the time of the trial-like nal hearing [Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 577 (2d Cir. 2005), quoting Odfjell ASA v. Celanese AG, 348 F. Supp. 2d 283, 287 (S.D.N.Y. 2004); see also Hay Group v. E.B.S. Acquisition Corp., 360 F.3d 404, 413-14 (3d Cir. 2004) (Chertoff, J., concurring)]. Some courts have approved pre-hearing subpoenas for production of 40-102
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documents, but not for depositions [see SchlumbergerSema, Inc. v. Xcel Energy, Inc., No. 02-4304, 2004 U.S. Dist. LEXIS 389, at *7 (D. Minn. Jan. 9, 2004); Atmel Corp. v. LM Ericsson Telefon, AB, 371 F. Supp. 2d 402, 403-04 (S.D.N.Y. 2005); Integrity Ins. Co. v. Am. Centennial Ins. Co., 885 F. Supp. 69, 71 (S.D.N.Y. 1995)]. Other courts have acknowledged broad arbitral power to order both documentary and testimonial discovery of nonparties before a nal hearing, a result that can be justied especially where such discovery may facilitate speedier resolution of the principal dispute [see Stanton v. Paine Webber Jackson & Curtis, Inc., 685 F. Supp. 1241, 1242-43 (S.D. Fla. 1988)]. Several courts weighing the question of arbitral power to summon pre-hearing evidence from non-parties have taken into account the non-parties relationships to the parties and to the disputed matters [see In re Sec. Life Ins. Co. of Am., 228 F.3d at 871; In re Arbitration between Douglas Brazell v. Am. Color Graphics, Inc. 2000 U.S. Dist. LEXIS 4482, at *9; Meadows Indemnity Co., Ltd. v. Nutmeg Ins. Co., 157 F.R.D. 42, 45 (M.D. Tenn. 1994)].
Cross Reference: Several arbitration organizations have published discovery procedures that can be incorporated in arbitration agreements or otherwise adopted by parties for use in reinsurance arbitrations. ARIAS-U.S., for example, includes discovery procedures in its Practical Guide to Reinsurance Arbitration Procedure [see ARIASU.S. Practical Guide at www.arias-us.org]. Discovery also is included in the Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes published by the Insurance and Reinsurance Dispute Resolution Task Force [see Procedures at www.arbitrationtaskforce.org]. In addition, The CPR International Reinsurance Industry Dispute Resolution Protocol, published by the International Institute for Conict Prevention & Resolution, includes procedures for the parties exchange of information [see Protocol at www.insurancemediation.org]. z Strategic Point: Given the conicting case law interpreting arbitra-
tors subpoena power under Section 7 of the FAA, it is unclear whether a pre-hearing arbitral subpoena issued to a non-party will be enforced by a court. Reinsurance intermediaries are typically not parties to arbitrations between ceding insurers and reinsurers but often possess critical information relevant to reinsurance agreements. Parties who wish to ensure that intermediaries will be required to provide prehearing testimonial and documentary evidence in the event a reinsurance dispute reaches arbitration have several options: 1. The intermediary can be made a party to the reinsurance 40-103
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contract, making it a three-way agreement among the cedent, reinsurer and intermediary; 2. The intermediary can be made a party only to the intermediary and arbitration clauses of the reinsurance agreement (in either case, the arbitration clause could provide that the intermediary submit to pre-hearing discovery in disputes arising out of the agreement); and A provision in the agreement between the ceding insurer and its intermediary can require the intermediary to cooperate with the arbitration panel in pre-hearing discovery in any dispute arising under an reinsurance contract placed by the intermediary.
3.
Of course, intermediaries may resist such approaches. As a practical matter, at the time of a dispute, both parties to the reinsurance contract may wish to have access to the intermediarys documents and witnesses, and either or both may have ongoing commercial relations with the intermediary, both of which counsel that the parties may be able to reach a practical accommodation of the intermediarys interest (including perhaps agreeing to defray part of the intermediarys cost of compliance).
Consider: Nevertheless, the federal District Court for the District of
Massachusetts, following the Third Circuits decision in Hay Group Inc., dismissed a petition to enforce a subpoena that had been issued by an arbitration panel to a non-party [Liberty Mut. Ins. Co. v. White Mountains Ins. Group Ltd., No. 06-11901 (D. Mass. 2007), reprinted in Mealeys Litig. Rep. Reinsurance, Vol. 17, No. 22 (Mar. 22, 2007) at 4].
40.26 Summary Disposition in Arbitration. Dispositive motions have tradi-
tionally been granted sparingly in reinsurance arbitrations; however, there appears to be a growing understanding that such motions should be granted in arbitrations where the facts and circumstances so warrant. There is ample authority supporting an arbitration panels granting of a motion for summary disposition without live testimony or a full evidentiary hearing, if the evidence omitted is not legally relevant or is cumulative. Although there is no express statutory authority under the Federal Arbitration Act (FAA) [9 U.S.C. 1, et seq.] for an arbitrator to respond to a dispositive motion, arbitrators are generally assumed to have all discretionary authority necessary to conduct the proceedings in a manner that is not expressly prohibited by the arbitration agreement between the parties or the FAA [Terry L. Trantina, An Attorneys Guide to Alternative Dispute Resolution (ADR): ADR 1.01, 1 A.B.A. Sec. Bus. L. 8 (Jan. 2003), 40-104
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available at http://www.abanet.org/buslaw/newsletter/0008/adr/ adr101.pdf; see also John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)]. The revised Uniform Arbitration Act (the UAA) expressly permits arbitrators to decide a request for summary disposition based solely on documentation, after a party submitting the request gives notice and opposing parties have a reasonable time to respond [see UAA 15(b) (2000), available at http://www.nccusl.org]. The Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes issued by the Insurance and Reinsurance Dispute Resolution Task Force also specically authorize consideration of summary disposition motions by reinsurance arbitration panels [Reinsurance Assn of America, Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes 13.1 (2004)]. In addition, the American Arbitration Association (AAA) Commercial Arbitration Rules give arbitrators wide latitude to conduct the proceedings and do not prohibit the use of dispositive motions. The AAA Procedures for Large, Complex Commercial Disputes also appear to permit summary adjudication by allowing arbitrators to take such steps as they may deem necessary or desirable to avoid delay and to achieve a just, speedy and cost-effective resolution of the cases [American Arbitration Assn, Commercial Arbitration Rules and Mediation Procedures R-30(b) (2005); American Arbitration Assn, Procedures for Large, Complex Commercial Disputes L-4(a) (2005)]. Parties may agree upon appropriate procedures by contract, but where they do not, arbitrators have wide discretion to decide procedural matters and determine the meaning of procedural rules [see Bell AtlanticPennsylvania, Inc. v. Communications Workers of Am., Local 13000, 164 F.3d 197, 201-02 (3d Cir. 1999); Raytheon Co. v. Computer Distrib., Inc., 632 F. Supp. 553, 557-58 (D. Mass. 1986); for a discussion of arbitrators freedom to dispense with judicial formalities and determine arbitration procedures, see 40.23 above]. Consistent with the goals of speed and efficiency in arbitration, arbitrators are encouraged to take appropriate action to simplify and expedite proceedings [see PaineWebber Group, Inc. v. Zinsmeyer Trusts Pship, 187 F.3d 988, 995 (8th Cir. 1999); Cearfoss Constr. Corp. v. Sabre Constr. Corp., 1989 U.S. Dist. LEXIS 9639, at *12-13 (D.D.C. Aug. 10, 1989)]. Unless otherwise restricted, this mandate leaves arbitrators free to consider and grant motions for summary adjudication of issues or summary judgment The power of arbitrators to grant summary disposition may be restricted, however, by arbitration agreements that expressly limit such authority. The FAA requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms, and parties may stipulate by contract the rules under which their arbitration will be 40-105
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conducted [see Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995); Baravati v. Josephthal, Lyon & Ross, Inc. 28 F.3d 704, 709 (7th Cir. 1994)]. Arbitrators generally are required to follow any procedures set forth in the parties agreement [W. Employers Ins. Co. v. Jeffries & Co., 958 F.2d 258, 262 (9th Cir. 1992)]. Therefore, a contract provision prohibiting summary adjudication in the arbitration proceeding most likely precludes such action. The authority of arbitrators to decide motions for summary disposition is usually litigated in court proceedings to vacate or conrm the award. Generally, there are very limited grounds for courts to vacate arbitral awards under the FAA, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and state arbitration acts. [For a discussion of the circumstances under which courts vacate arbitral awards, see 40.28 below]. Challenges to an arbitration panels decision to grant a motion for summary disposition typically fall into two categories. Parties contend that the arbitrators lacked the authority to grant the dismissal motion (exceeded their powers) or assert that the panel engaged in misconduct by improperly refusing to hear evidence. Courts have made clear that misbehavior cognizable under Section 10(a)(3) of the FAA must amount to a denial of fundamental fairness of the arbitration proceeding in order to justify overturning an award [Max Marx Color & Chem. Co. Employees Prot Sharing Plan v. Barnes, 37 F. Supp. 2d 248, 252 (S.D.N.Y. 1999)]. In the cases conrming summary decisions, courts agreed with the arbitrators that an evidentiary hearing was not necessary because any excluded evidence either was duplicative or not material to the issues in dispute [see Hudson v. ConAgra Poultry Co., 2007 U.S. App. LEXIS 7681, at *19-20 (8th Cir. 2007); Sheldon v. Vermonty, 269 F.3d 1202, 1207 (10th Cir. 2001); Pegasus Constr. Corp. v. Turner Constr. Co., 929 P.2d 1200, 1201-03 (Wash. Ct. App. 1997)]. Alternatively, courts vacating summary awards determined that summary adjudication was inappropriate because the arbitrators failure to receive pertinent evidence resulted in palpable prejudice to a party [see Intl Union, United Mine Workers of Am. v. Marrowbone Dev. Co., 232 F.3d 383, 387-90 (4th Cir. 2000); Prudential Sec., Inc. v. Dalton, 929 F. Supp. 1411, 1417-18 (N.D. Okla. 1996)]. Vacatur will not be granted simply because the court might have come to a different result.
Examples: Several courts have found that the hearing mandated by
Section 10 of the FAA does not necessarily require oral presentation or live witness testimony [see, e.g., Fed. Deposit Ins. Corp. v. Air Fla. Sys., Inc., 822 F.2d 833, 842-43 (9th Cir. 1987); Griffen Indus. v. Petrojam, Ltd., 58 F. Supp. 2d 212, 219-21 (S.D.N.Y. 1999); but see British Ins. Co. 40-106
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of Cayman v. Water St. Ins. Co., 93 F. Supp. 2d 506, 517-19 (S.D.N.Y. 2000)].
Examples: Courts have conrmed summary awards in arbitral pro-
ceedings despite the absence of explicit authorization for the procedure in the governing rules or statutes [see Melchers v. Corbin Assocs., LLC, 2006 U.S. Dist. LEXIS 18049, at *19-26 (E.D. Tenn. 2006); Pegasus Constr. Corp. v. Turner Constr. Co., 929 P.2d 1200, 1203 (Wash. Ct. App. 1997); Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal. App. 4th 1096, 1104 (1995)].
Example: A federal district court conrmed an arbitration panels summary award where a party, All American Life Insurance Co. (All American), admitted in its position statement that a broker did not have the authority to bind All American to the contracts at issue in the dispute. The panel found that the position statement constituted a pleading and that All American had made an irrevocable admission that the broker did not have binding authority; therefore the contracts were not valid [Sphere Drake Ins. Ltd. v. All Am. Life Ins. Co., 2004 U.S. Dist. LEXIS 3494, at *8-10 (N.D. Ill. 2004)]. In a motion to vacate the award, All American argued that it had been denied a fundamentally fair hearing because the panel gave undue weight to the alleged admission, exceeded its authority by deciding a legal issue reserved for the courts and a factual issue not before it, and exhibited a manifest disregard for the law by misinterpreting state contract law [id. at *33-42]. In affirming the panels award, the court did not specically address whether or not the panel had the authority to decide the matter by ruling on the motion for judgment on the pleadings. However, the courts opinion clearly assumes that the panel had this power and rejects each of All Americans purported grounds for vacatur [id.]. z Strategic Point: Dispositive motions can streamline the arbitral
process by eliminating specious claims and defenses. Although arbitrators are sometimes wary of the practice and courts will carefully scrutinize summary rulings, submission of dispositive motions can be a successful and appropriate tactic in arbitration where there is no relevant or material evidence necessary for resolution of a particular claim, or of the entire dispute.
40.27 Reasoned Awards. Reinsurance arbitration panels typically issue a
signed written decision articulating the award. If the decision is not unanimous, a written dissent also may be issued. In the United States, an 40-107
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arbitration panel need not set forth the rationale supporting its award, unless the parties arbitration agreement requires it to do so [N.Y. Stock Exch. Arbitration between Fahnestock & Co., Inc. v. Waltman, 935 F.2d 512, 516 (2d Cir. 1991); Koch Oil, S.A. v. Transocean Gulf Oil Co., 751 F.2d 551, 554 (2d Cir. 1985)]. Thus, many arbitral decisions are presented in a brief statement outlining the nature of the dispute, stating the prevailing party and describing any relief awarded. The parties may, however, require the reinsurance arbitration panel to explain the reasoning for an award as a pre-requisite for being appointed to the panel.
z Strategic Point: Although arbitration is sometimes derided as un-
duly allowing arbitrators to reach compromise awards, that also is one virtue of the process, so parties should consider their philosophical tolerance for one approach or the other when drafting an arbitration clause. Note also that the absence of reasoned awards, especially when honorable engagement clauses apply, may increase differences in outcomes from one arbitration to the next; whether differences in the outcomes in a portfolio of similar disputes is acceptable or not is something parties should consider at the time they draft their arbitration agreements.
40.28 Know When to Move to Vacate or Afrm Arbitration Award. After a
reinsurance arbitration panel renders its award, the prevailing party may submit a motion in court to conrm the award or the losing party may move to have the award vacated, or both. These steps are not necessary if the parties simply act in accordance with the award but are often taken to conclude or challenge the process.
z Strategic Point: On balance, it is probably a good practice for the
prevailing party to have the award conrmed even if the losing party intends to comply with the award. A conrmation action need not be contentious, but it allows the prevailing party to have an executable judgment.
s Timing: If the arbitration agreement species a particular court for
conrmation, the party seeking to conrm the award may request a conrmation order from the specied court any time within one year of the award [9 U.S.C. 9].
Consider: If the arbitration agreement does not specify a conrmation
court, application for conrmation may be made to the United States court in and for the district within which [the] award was made [id.]. An arbitration award will be summarily conrmed upon motion by a party, absent grounds for vacatur, modication or correction [id.]. It 40-108
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should be noted that moving to conrm or vacate an award under the Federal Arbitration Act does not in and of itself constitute a basis for federal court jurisdiction (so independent subject matter jurisdiction is needed though the fact of an arbitration alone is sufficient to show an actual controversy), although moving to conrm or vacate under the New York Convention does provide an independent fount of jurisdiction in the appropriate court. The grounds upon which an arbitration award can be vacated are extremely narrow under the Federal Arbitration Act (FAA) [9 U.S.C. 10], state statutes and the New York Convention. The [e]xceptions to conrmation are strictly limited so as not to frustrate the basic purpose of arbitration to dispose of disputes quickly and to avoid the expense and delay of protracted court proceedings [Transit Cas. Co. v. Trenwick Reinsurance Co., 659 F. Supp. 1346, 1351 (S.D.N.Y. 1987)]. While decades ago courts were more receptive to challenges to arbitration awards, that is not true today. Under Section 10 of the FAA, awards typically are vacated only where arbitrators exhibited bias or procedural unfairness (as opposed to procedural error). The district courts are not to function as an appellate forum to second-guess what happened in the arbitration, and the standard of review they apply is much narrower than the federal appellate courts apply to decisions of the district courts. The following are the specic statutory circumstances justifying vacatur of an arbitral award:
Where the award was procured by corruption, fraud, or undue means [9 U.S.C. 10(a)(1)]. A party who alleges that an arbitration award was procured through fraud or undue means must demonstrate that the improper behavior was: (1) not discoverable by due diligence before or during the arbitration hearing; (2) materially related to an issue in the arbitration; and (3) established by clear and convincing evidence [Houston Gen. Ins. Co. v. Certain Underwriters at Lloyds London, 2003 U.S. Dist. LEXIS 19516, at *3-4 (S.D.N.Y. 2003); Trans Chem. Ltd. v. China Natl Mach. Import & Export Corp., 978 F. Supp. 266, 304 (S.D. Tex. 1997)]. Fraud typically requires a showing of bad faith and may be evidenced by bribery or by willful destruction or withholding of evidence [id.; Indocomex Fibres Pte., Ltd. v. Cotton Co. Intl, Inc., 916 F. Supp. 721, 728 (W.D. Tenn. 1996)]. Where there was evident partiality or corruption in the arbitrators, or either of them [9 U.S.C. 10(a)(2)]. Although there is disagreement among courts as to precisely what an arbitrator must disclose to avoid a claim of evident partiality, courts typically look for a real and direct nancial interest in the result of the arbitration or a 40-109
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direct business relationship with one of the parties that calls into question his or her neutrality [see Commonwealth Coatings Corp. v. Contl Cas. Co., 393 U.S. 145, 146-48 (1968); Sphere Drake Ins. Ltd. v. All Am. Life Ins. Co., 307 F.3d 617, 621-23 (7th Cir. 2002); Hobet Mining, Inc. v. Intl Union, United Mine Workers, 877 F. Supp. 1011, 1021 (S.D. W. Va. 1994)]. Nondisclosure sufficient to vacate an award usually creates a concrete, and not merely speculative, impression of bias [see Positive Software Solutions, Inc. v. New Century Mortgage Corp., 476 F.3d 278, 286 (5th Cir. 2007); Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th Cir. 2002); Gianelli Money Purchase Plan and Trust v. ADM Investor Servs., Inc., 146 F.3d 1309, 1312-13 (11th Cir. 1998)]. Some courts have stated that evident partiality is present when a reasonable person would conclude that the arbitrator acted with partiality (but mere unhappiness in or disagreement with the outcome is not equated with the arbitrators having acted in a partial manner) [Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1523 n.30 (3d Cir. 1994), (citations omitted); Lourdes Med. Ctr. of Burlington County v. Jnesco, 2007 U.S. Dist. LEXIS 25458, at *24-25 (D.N.J. 2007); Vigorito v. UBS Painewebber, Inc., 477 F. Supp. 2d 481, 486-87 (D. Conn. 2007)].
Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced [9 U.S.C. 10(a)(3)]. Arbitrators are accorded wide latitude in conducting hearings and are not constrained by formal rules of procedure or evidence [Robbins v. Day, 954 F.2d 679, 685 (11th Cir. 1991); for discussions of arbitrators broad powers to conduct proceedings, see 40.24, 40.25 and 40.26 above]. They may simplify and expedite proceedings, and they are not bound to hear all of the evidence tendered by the parties [PaineWebber Group, Inc. v. Zinsmeyer Trusts Pship, 187 F.3d 988, 995 (8th Cir. 1999); Robbins v. Day, 954 F.2d 679, 685 (11th Cir. 1992)]. Therefore, an arbitral award will not be vacated unless an error in the arbitral misconduct deprived a party of a fundamentally fair hearing [El Dorado Sch. Dist. #15 v. Contl Cas. Co., 247 F.3d 843, 847-48 (8th Cir. 2001); Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 1997)]. Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, nal and denite award upon the subject matter submitted was not made [9 U.S.C. 10(a)(4)]. The 40-110
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question whether arbitrators have exceeded their powers focuses on whether the arbitration agreement, or the parties submissions to the panel, gave the arbitrators the power to reach a particular issue [Reliastar Life Ins. Co. of N.Y. v. EMC Natl Life Ins. Co., 2007 U.S. Dist. LEXIS 9861, at *3-4 (S.D.N.Y. 2007)]. An award will not be vacated for indeniteness unless it is not sufficiently clear or specic enough to be enforced if judicially conrmed [IDS Life Ins. Co. v. Royal Alliance Assocs, 266 F.3d 645, 650 (7th Cir. 2001); Certain Underwriters at Lloyds v. BCS Ins. Co., 239 F. Supp. 2d 812, 816 (N.D. Ill. 2003)]. The burden of proof rests on the party seeking to vacate an arbitral award [Transit Cas. Co. v. Trenwick Reinsurance Co., 659 F. Supp. 1346, 1351 (S.D.N.Y. 1987)]. Some courts have determined that an award also may be vacated when an arbitrator exhibits a manifest disregard of the law [see Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 208-09 (2d Cir. 2002); Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832 (9th Cir. 1995)], a rule that cannot be vigorously applied in the teeth of an honorable engagement clause. Courts recognizing this doctrine will not disturb an arbitrators interpretation of the law unless it is clear that the arbitrator appreciated[d] the existence of a clearly governing legal principle but decided[d] to ignore or pay no attention to it [Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986). The error must have been obvious and capable of being readily and instantly perceived by the average person qualied to serve as an arbitrator [id.]. Other courts have rejected the manifest disregard of the law standard as reect[ing] precisely that mistrust of arbitration . . . which the [United States Supreme] Court [has] criticized [Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 706 (7th Cir. 1994); see also Robbins v. Day, 954 F.2d 679, 684 (11th Cir. 1992)]. The manifest disregard of the law standard has not been applied so as to vacate a reinsurance arbitration award in any reported court decision; recent reported cases in both reinsurance and non-insurance arbitrations should not provide condence that this vein will prove to be a particularly promising angle to mine. Another potential challenge to an arbitral award is the assertion that the award is contrary to public policy [see United Paperworkers Intl Union v. Misco, Inc., 484 U.S. 29, 43 (1987); Milwaukee Bd. of Sch. Dirs. v. Milwaukee Teachers Educ. Assn, 287 N.W.2d 131, 135 (Wis. 1980)]. More action has occurred in the non-insurance context on this argument, especially concerning relationships between employers and employees, health care providers and their members, and other relationships marked 40-111
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by imbalances of power such as consumer contracts. This exception to the general deference granted arbitrators is very limited and can succeed only if the decision clearly violates explicit, well-dened and dominant public policy that can be easily seen in laws or judicial precedent [Commercial Union Ins. Co. v. Lines, 378 F.3d 204, 208-09 (2d Cir. 2004); Painewebber, Inc. v. Agron, 49 F.3d 347, 350 (8th Cir. 1995); Seymour v. Blue Cross/Blue Shield, 988 F.2d 1020, 1024 (10th Cir. 1993)]. With sophisticated commercial entities on both sides of a reinsurance contract, this style of argument too is unlikely to gain much traction in the absence of some well-ensconced public policy in the state (set forth in statute or prior high court decision). In the following limited circumstances, a United States court may issue an order modifying or correcting an arbitral award in order to effect the intent thereof and promote justice between the parties:
Where there was an evident material miscalculation of gures or an evident material mistake in the description of any person, thing or property referred to in the award; Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted; and Where the award is imperfect in matter of form not affecting the merits of the controversy [9 U.S.C. 11].
Consider: If the arbitration is conducted under the auspices of an
arbitration organization, then the rules of that agency concerning appeals of arbitral awards may apply.
Example: The federal District Court for the District of the Virgin Islands
affirmed vacatur of an arbitral award where the arbitrator failed to postpone the hearing after a party submitted an amended arbitration claim and voluminous supporting documentation 24 hours before the scheduled hearing and denied the opposing party a continuance to investigate the amended claim [Coastal Gen. Constr. Servs., Inc. v. Virgin Islands Hous. Auth., 238 F. Supp. 2d 707, 708-10 (D.V.I. 2002)].
Example: The Tennessee Court of Appeals affirmed the trial courts
refusal to vacate an arbitral award on the basis of evident partiality, where the party did not object to or seek clarication of the arbitrators disclosed conict of interest until after an unfavorable award was issued [Bailey v. Am. Gen. Life and Accident Ins. Co., 2005 Tenn. App. LEXIS 838, at *27-30 (Tenn. Ct. App. 2005)].
Examples: A federal district court ordered correction of an arbitral
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award to conform the amount of the written award to the amount the panel had verbally announced [Nationwide Mut. Ins. Co. v. First State Ins. Co., 213 F. Supp. 2d 10, 14-16 (D. Mass. 2002)]. A federal district court remanded the case to the arbitrators with directions to reopen the proceedings and correct an acknowledged material miscalculation [Laurin Tankers Am., Inc. v. Stolt Tankers, Inc., 36 F. Supp. 2d 645, 652-53 (S.D.N.Y. 1999)]. All of these decisions are motivated by a decision to correct an obvious clerical error, rather than to change the relationship between the arbitrating parties following the arbitration award.
40.29 ARIAS Forms. The AIDA Reinsurance and Insurance Arbitration
Society, ARIAS-U.S., is a not-for-prot corporation that promotes the improvement of the insurance and reinsurance arbitration process for the international and domestic markets. ARIAS-U.S. provides training, conferences and workshops to educate prospective arbitrators. ARIAS-U.S. also provides a variety of forms related to specic stages of the arbitration process that are referenced in its Practical Guide to Reinsurance Arbitration Procedure. ARIAS-U.S. provides the following forms:
Application for Certication as an Arbitrator; Application for Qualication as Mediator; Hold Harmless Stipulation; Condentiality Agreement; Condentiality Affidavit; Discovery & Brieng Schedule; Order Requiring Respondent to Post Security; Umpire Questionnaire [see 40.47 below]; Umpire Selection Procedure Request Letter; Neutral Selection Questionnaire; Neutral Selection Procedure Request Letter; Membership Application; and Practical Guide to Reinsurance Arbitration Procedure Complete 2004 Revised Edition.
These forms are available on the ARIAS-U.S. website at www.arias-us.org.

Lexis.com Search: For information on international reinsurance issues,
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try this source: Global Reinsurance. Enter specic search terms or date ranges.
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X.
FORMS.
40.30 BRMA Reinsuring Clause Form 44 C (Quota Share Agreement). Use of Form: The wording stipulating the quota share terms is typically set forth in the contracts Reinsuring Clause, Limit and Retention or Limit of Liability clause. Several forms are reprinted from the Brokers and Reinsurance Markets Association (BRMA) Contract Reference Book, available at http://www.brma.org/frommembers/ frommemcontractwd01.htm. Lexis.com Search: For further jurisdiction-specic forms, please see:
ISO Policy Forms. Enter this search request: reinsurance AND [state]. REINSURING CLAUSE By this Contract the Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept % quota share reinsurance of the Companys net liability under policies, contracts and binders of insurance or reinsurance (hereinafter called policies) in force at and becoming effective at and after (hour) (date) (year), including renewals, and classied by the Company as . Net liability as used herein is dened as the Companys gross liability remaining after cessions, if any, to . The liability of the Reinsurer with respect to each cession hereunder shall commence obligatorily and simultaneously with that of the Company, subject to the terms, conditions and limitations hereinafter set forth.
40.31 BRMA Reinsuring Clause Form 44 B (Surplus Share Agreement). Use of Form: The details of a surplus share agreement are usually contained in the Reinsuring Clause, the Cessions and Limits or the Business Covered clause of the contract.
REINSURING CLAUSE The Company shall cede to the Reinsurer and the Reinsurer shall accept from the Company 100% of the rst surplus liability, as hereinafter dened, of the Company on risks insured under policies in force at or becoming effective or renewed at and after hour (date) (year), covering the lines of business set forth below, subject to the terms, conditions and limitations hereinafter set forth: LINES OF BUSINESS A. 40-115
40.32 B C
A policy written on an installment premium, report from or continuous basis shall be considered renewed as of the end of each annual period commencing with the caption date of the policy. The term policies as used herein means the Companys binders, policies and contracts providing insurance and reinsurance on the lines of business covered under this Contract.
40.32 BRMA Reinsuring Clause Form 61 C (Excess of Loss Agreement). Use of Form: The clause dening an excess of loss agreement can be
called the Reinsuring Clause, Cover Clause, Business Reinsured Clause or Application of Agreement Clause, and it sets forth the type of business covered and the method of determining whether a loss falls within the scope of the agreement. Excess liability should be dened in the contract. REINSURING CLAUSE By this Contract the Reinsurer agrees to reinsure the excess liability that may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (referred to herein as policies) in force at the effective date hereof or issued or renewed on or after that date, and classied by the Company as , subject to the terms, conditions an limitations hereafter set forth.
40.33 BRMA Unauthorized Reinsurance Clause Form 55 A. Use of Form: This form applies only to a reinsurer that does not qualify
for full credit with any insurance regulatory authority having jurisdiction over the companys reserves. The form covers unearned premium, outstanding losses and incurred but not reported reserves (IBNR). UNAUTHORIZED REINSURANCE As regards policies or bonds issued by the Company coming within the scope of this Contract, the Company agrees that when it shall le with the insurance regulatory authority or set up on its books reserves for unearned premium and losses covered hereunder which it shall be required by law to set up, it will forward to the Reinsurer a statement showing the proportion of such reserves applicable to the Reinsurer. The Reinsurer hereby agrees to fund such reserves in respect of unearned premium, known outstanding losses that have been reported to the 40-116
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Reinsurer and allocated loss adjustment expense relating thereto, losses and allocated loss adjustment expense paid by the Company but not recovered from the Reinsurer, plus reserves for losses incurred but not reported, as shown in the statement prepared by the Company (hereinafter referred to as Reinsurers Obligations) by funds withheld, cash advances or a Letter of Credit. The Reinsurer shall have the option of determining the method of funding provided it is acceptable to the insurance regulatory authorities having jurisdiction over the Companys reserves. When funding by a Letter of Credit, the Reinsurer agrees to apply for and secure timely delivery to the Company of a clean, irrevocable and unconditional Letter of Credit issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Companys reserves in an amount equal to the Reinsurers proportion of said reserves. Such Letter of Credit shall be issued for a period of not less than one year and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days (sixty (60) days where required by insurance regulatory authorities) prior to any expiration date the issuing bank shall notify the Company by certied or registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. The Reinsurer and Company agree that the Letters of Credit provided by the Reinsurer pursuant to the provisions of this Contract may be drawn upon at any time, notwithstanding any other provision of this Contract, and be utilized by the Company or any successor, by operation of law, of the Company including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company for the following purposes, unless otherwise provided for in a separate Trust Agreement: (a) to reimburse the Company for the Reinsurers Obligations, the payment of which is due under the terms of this Contract and which has not been otherwise paid; (b) to make refund of any sum which is in excess of the actual amount required to pay the Reinsurers Obligations under this Contract; (c) to fund an account with the Company for the Reinsurers Obligations. Such cash deposit shall be held in an interest bearing account separate from the Companys other assets, and interest thereon not in excess of the prime rate shall accrue to the benet of the Reinsurer; and (d) to pay the Reinsurers share of any other amounts the Company claims are due under this Contract. In the event the amount drawn by the Company on any Letter of Credit 40-117
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is in excess of the actual amount required for (a) or (c), or in the case of (d), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Company or the Reinsurer. The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than quarterly, the Company shall prepare a specic statement of the Reinsurers Obligations, for the sole purpose of amending the Letter of Credit, in the following manner: (a) If the statement shows that the Reinsurers Obligations exceed the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment to the Letter of Credit increasing the amount of credit by the amount of such difference. (b) If, however, the statement shows that the Reinsurers Obligations are less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit.
40.34 BRMA Insolvency Clause Form 19 M. Use of Form: This Article contains payable on demand language in
the rst sentence. Note that it also contains the word or rather than and in the second sentence after New York Insurance Law, thus making the exceptions to the direct payments to the Company (or its liquidator, receiver, conservator or statutory successor) independent of each other. The Offset provision in the nal paragraph is for this Contract only. INSOLVENCY In the event of the insolvency of the Company, reinsurance under this Contract shall be payable on demand, with reasonable provision for verication, on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any liquidator, receiver, conservator or statutory successor of the Company having authority to 40-118
40.35
allow such claims, without diminution because of such insolvency or because such liquidator, receiver, conservator or statutory successor has failed to pay all or a portion of any claims. Such payments by the Reinsurer shall be made directly to the Company or its liquidator, receiver, conservator or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where the Contract specically provides another payee of such reinsurance in the event of the insolvency of the Company, or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the policy or policies reinsured within a reasonable time after such claim is led in the insolvency proceeding and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benet which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver or conservator be appointed, all amounts due either Company or Reinsurer, whether by reason of premium, losses or otherwise under this Contract, shall be subject to the right of offset at any time and from time to time, and upon the exercise of the same, only the net balance shall be due.
40.35 BRMA Offset Clause Form 36 A. Use of Form: This is a broad offset clause which permits offset of
mutual debits and credits across all existing and future reinsurance agreements. OFFSET The Company and the Reinsurer may offset any balance or amount due 40-119
40.36
from one party to the other under this Contract or any other contract heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company. This provision shall not be affected by the insolvency of either party to this Contract.
40.36 BRMA Loss Notice Clause Form 26 B. Use of Form: This clause requires the ceding company to provide
prompt notice of losses and of all subsequent developments. LOSS NOTICE The Company shall advise the Reinsurer promptly of all losses which, in the opinion of the Company, may result in a claim hereunder and of subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurer.
40.37 Notice of Loss Clause Incorporating Right to Associate. Use of Form: This notice of loss clause incorporates the reinsurers right
to associate in the defense of any claim.

Source of Form: This wording is provided in the Business Insurance
Law and Practice Guide 14.08[7] (LexisNexis). NOTICE OF LOSS Prompt notice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance and, while the Reinsurer does not undertake to investigate or defend claims or suits, it shall nevertheless have the right and be given the opportunity to associate with the company and its representatives at the Reinsurers expense in the defense and control of any claim, suit or proceeding involving this reinsurance, with the full cooperation of the Company.
40.38 BRMA Loss Notice Clause Form 26 A. Use of Form: This clause species that prompt notice to the reinsurer is a condition precedent to recovery.
LOSS NOTICE As a condition precedent to recovery hereunder, the Company shall advise the Reinsurer promptly of all losses which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the 40-120
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position of the Reinsurer.

40.39 BRMA Access to Records Clause Form 1 B. Use of Form: This clause allows the reinsurer or its representative broad
access to all matters relating to the reinsurance at all reasonable times. ACCESS TO RECORDS The Reinsurer or its designated representatives shall have free access to the books and records of the Company on matters relating to this reinsurance at all reasonable times for the purpose of obtaining information concerning this Contract or the subject matter hereof.
40.40 BRMA Condentiality Clause Form 69 D. Use of Form: This clause can be used in conjunction with or added as
a paragraph of an access to records clause. It allows information sharing with other entities if prior consent is obtained. CONFIDENTIALITY The Reinsurer, except with the express prior written consent of the Company, shall not directly or indirectly communicate, disclose or divulge to any third party any knowledge or information that may be acquired either directly or indirectly as a result of the inspection of the Companys books, records and papers. The restrictions as outlined in this Article shall not apply to communications or disclosures that the Reinsurer is required to make to its statutory auditors, retrocessionaires, legal counsel or arbitrators involved in any arbitration procedures under this Contract, or to disclosures required under subpoena or other duly-issued order of a court or other governmental agency or regulatory authority.
40.41 BRMA Claims Cooperation Clause Form 8 A. Use of Form: This is a stand-alone claims cooperation clause. Other
clauses, in conjunction with the notice of loss provision or separately, include an admonition that the reinsured (not the reinsurer) has a duty to investigate and defend a claim. CLAIMS COOPERATION When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or 40-121
40.42 proceeding.
40.42 BRMA Excess of Original Policy Limits Clause Form 15 A. Use of Form: This clause is for use in excess of loss contracts where the
percentage of coverage provided for XPL is specied in the Ultimate Net Loss article of the contract. EXCESS OF ORIGINAL POLICY LIMITS This Contract shall protect the Company, within the limits hereof, in connection with ultimate net loss in excess of the limit of its original policy, such loss in excess of the limit having been incurred because of failure by it to settle within the policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purpose of this Article, the word loss shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original policy.
40.43 BRMA Extra Contractual Obligations Clause Form 16 D. Use of Form: This clause is for use in a reinsurance contract where the percentage of coverage provided for ECO is specied elsewhere in the contract. Insurance or other reinsurance recoveries, which protect the Company for ECO, shall be deducted when determining the total ECO loss under this reinsurance contract.
EXTRA CONTRACTUAL OBLIGATIONS A. Extra Contractual Obligations are dened as those liabilities not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or 40-122
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reinsured or in the preparation or prosecution of an appeal consequent upon such action. B. The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence. However, coverage hereunder as respects Extra Contractual Obligations shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. Recoveries from any other form of insurance or reinsurance, which protects the company against claims the subject matter of this Article, shall inure to the benet of the Reinsurer.
C.
D.
40.44 BRMA Intermediary Clause Form 23 A. Use of Form: This typical intermediary clause creates an exception to
the usual agency relationship between an intermediary and the reinsured and places the credit risk of the intermediary on the reinsurer. INTERMEDIARY (Intermediary Name) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through (Intermediary Name and Address). Payments by the company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.
40.45 BRMA Arbitration Clause Form 6 A. Use of Form: This clause denes arbitrable matters as any dispute or other matter in question between the Company and the Reinsurer arising out of, or relating to, the formation, interpretation, performance, or breach of this Contract. This language is intended to grant arbitrators broad authority to hear disputes that could arise under or
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with respect to the contract, including disputes relating to the formation and validity of the arbitration clause. The second paragraph addresses the situation where more than one reinsurer has taken the same position with respect to a dispute with the cedent. Under this wording, the reinsurers must consolidate and act jointly for the purposes of the arbitration. Parties seeking to avoid mandatory consolidation in the event of a dispute can substitute the phrase may consolidate for shall consolidate. This clause also expressly permits the parties to agree upon a different location for the hearing from that which is specied. In addition, it provides that [j]udgment on the award may be entered in any court having jurisdiction thereof, which paraphrases the language of the FAA, 9 U.S.C 9, authorizing certain courts to conrm an award. ARBITRATION Any dispute or other matter in question between the Company and the Reinsurer arising out of, or relating to, the formation, interpretation, performance or breach of this Contract, whether such dispute arises before or after termination of this Contract, shall be settled by arbitration. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for the purposes of this Article, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint. Each party shall appoint an individual as arbitrator and the two so appointed shall then appoint a third arbitrator. If either party refuses or neglects to appoint an arbitrator within sixty (60) days, the other party may appoint the second arbitrator. If the two arbitrators do not agree on a third arbitrator within sixty (60) days, of their appointment, each of the arbitrators shall nominate three individuals. Each arbitrator shall then decline two of the nominations presented by the other arbitrator. The third arbitrator shall then be chosen from the remaining two nominations by drawing lots. The arbitrators shall be active or retired officers of insurance or reinsurance companies or Lloyds London Underwriters; the arbitrators shall not have a personal or nancial interest in the result of the arbitration. The arbitration hearings shall be held in (City, State), or such other place 40-124
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as may be mutually agreed. Each party shall submit its case to the arbitrators within sixty (60) days of the selection of the third arbitrator or within such longer period as may be agreed by the arbitrators. The arbitrators shall not be obliged to follow judicial formalities or the rules of evidence except to the extent required by governing law, that is, the state of the situs of the arbitration as herein agreed; they shall make their decisions according to the practice of the reinsurance business. The decision rendered by a majority of the arbitrators shall be nal and binding on both parties. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. Judgment upon the award rendered may be entered in any court having jurisdiction thereof.
40.46 BRMA Arbitration Clause Form 6 E. Use of Form: The third paragraph includes the phrase [a]ll arbitrators
shall interpret this Contract as an honorable engagement rather than as merely a legal obligation, which has been included in arbitration clauses for decades and is sometimes a subject of debate among parties to reinsurance agreements [for a discussion of the meaning and import of honorable engagement language, see 40.24]. ARBITRATION As a precedent to any right of action hereunder, if any differences shall arise between the contracting parties with reference to the interpretation of this Contract or their rights with respect to any transaction involved, whether arising before or after termination of this Contract, such differences shall be submitted to arbitration upon the written request of one of the contracting parties. Each party shall appoint an arbitrator within thirty (30) days of being requested to do so, and the two named shall select a third arbitrator before entering upon the arbitration. If either party refuses or neglects to appoint an arbitrator within the time specied, the other party may appoint the second arbitrator. If the two arbitrators fail to agree on a third arbitrator within thirty (30) days of their appointment, each of them shall name three individuals, of whom the other shall decline two, and the choice shall be made by drawing lots. All arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies or Underwriters at Lloyds London, not under the control of either party to this Contract. Each party shall submit its case to its arbitrator within thirty (30) days of the appointment of the third arbitrator or within such period as may be agreed by the arbitrators. All arbitrators shall interpret this Contract as an 40-125
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honorable engagement rather than as merely a legal obligation. They are relieved of all judicial formalities and may abstain from following the strict rules of law. They shall make their award with a view to effecting the general purpose of this Contract in a reasonable manner rather than in accordance with a literal interpretation of the language. The decision in writing of any two arbitrators, when led with the contracting parties, shall be nal and binding on both parties. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the third arbitrator and of the arbitration. In the event that two arbitrators are chosen by one party as above provided, the expense of the arbitrators and the arbitration shall be equally divided between the two parties. Any arbitration shall take place in the city in which the Companys Head Office is located unless some other place is mutually agreed upon by the contracting parties.
40.47 ARIAS-U.S. Umpire Questionnaire Sample Form 2.1. Use of Form: The AIDA Reinsurance and Insurance Arbitration Society, ARIAS-U.S., certies a pool of qualied arbitrators and serves as a resource for parties involved in a dispute to nd the appropriate persons to resolve the matter in a professional, knowledgeable and cost-effective manner. It is common practice for nominated panel members to disclose their contacts with the parties (and their counsel and any known witnesses) in the business world and in prior arbitrations, and with the particular contracts involved in the dispute. This proposed disclosure form designed for umpire candidates includes a variety of questions that may or may not serve as a basis to disqualify a panel member. This form can be tailored for partyarbitrators if the parties so desire.
UMPIRE QUESTIONNAIRE In the Matter of the Arbitration Between
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, Petitioner, - and , Respondent
UMPIRE QUESTIONNAIRE To help the parties evaluate the qualications of umpire nominees in the above-captioned arbitration, and to identify any potential conict of interest, please supply the following information: 1.Name: Company: Address: Telephone: Fax: Cell Phone: Email: Home Address: Telephone: 2. EMPLOYMENT HISTORY (please attach a current rsum or CV). A. Current Employment (if not apparent from the attached rsum or CV) Position Title: Length of Employment: Principal Duties: B. PAST QUALIFYING EMPLOYMENT (if not currently an officer of an insurance or reinsurance company [or an Underwriter at Lloyds of London] and if not apparent from the attached rsum or CV). _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ 3. Please provide a copy of your current fee schedule, including any refundable or non-refundable retainer. 4. INSURANCE ARBITRATION EXPERIENCE 40-127
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Have you previously participated as an arbitrator or umpire in connection with insurance disputes? [ ] Yes [ ] No If yes, please set forth: Number of appearances as an umpire: _________________________________________________________________ _________________________________________________________________ Number of appearances as an arbitrator: _________________________________________________________________ _________________________________________________________________ 5. REINSURANCE ARBITRATION EXPERIENCE Have you previously participated as an arbitrator or umpire in connection with reinsurance disputes? [ ] Yes [ ] No If yes, please set forth: Number of appearances as an umpire: _________________________________________________________________ _________________________________________________________________ Number of appearances as an arbitrator: _________________________________________________________________ _________________________________________________________________ 6. POTENTIAL CONFLICTS A. Are you presently or have you ever been an employee, officer, director, shareholder, agent or consultant of any of the parties listed below, or of the parties subsidiaries, affiliates or parent companies? [List of all applicable parties, subsidiaries, affiliates and parent companies] [ ] Yes [ ] No If yes, please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ B. Have you ever served as an arbitrator, umpire, attorney or expert witness in a matter involving any of the parties listed above or any subsidiaries, affiliates or parent companies of such parties? 40-128
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[ ] Yes [ ] No If yes, please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ C. Have you ever had any involvement in an insurance or reinsurance transaction or dispute involving any of the parties, or involving such parties subsidiaries, affiliates or parent companies? [ ] Yes [ ] No If yes, please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ D. Have you ever had any involvement in an insurance or reinsurance transaction or dispute involving any of the specic claims, policies and/or treaties at issue in this matter as described in Question 8 below? [ ] Yes [ ] No _________________________________________________________________ _________________________________________________________________ If yes, please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ E. To your knowledge, do any companies with which you are presently affiliated or in which you presently have a nancial interest have an ongoing business relationship with any of the parties and/or affiliates listed above? [ ] Yes [ ] No If yes, please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ EXPERIENCE WITH OTHER PANEL MEMBERS AND PARTIES COUNSEL A. Have you ever served on an arbitration panel with 40-129
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? Name of Arbitrator [ ] Yes [ ] No If yes, for each such arbitration, state the approximate date of commencement and termination (or whether still pending) and the respective capacities in which you and acted, i.e., as arbitrator or umpire. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ B. Have you ever served ? on an arbitration panel with
Name of Arbitrator [ ] Yes [ ] No If yes, for each such arbitration, state the approximate date of commencement and termination (or whether still pending) and the respective capacities in which you and acted, i.e., as arbitrator or umpire. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ C. Have you ever served as an arbitrator, umpire, expert witness or consultant in an arbitration or litigation at the request of any counsel involved in this arbitration? [List counsel for all parties] [ ] Yes [ ] No If yes, identify counsel and disclose type of service and approximate date so engaged. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ D. Have you ever served as an arbitrator, umpire, expert witness or consultant in an arbitration or litigation in which any of the above-listed counsel represented a party? [ ] Yes [ ] No If yes, identify counsel and disclose type of service and approximate date so engaged. _________________________________________________________________ 40-130
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_________________________________________________________________ _________________________________________________________________ 8. SUBJECT MATTER OF THE ARBITRATION This arbitration involves [insert a neutral description of the dispute between the parties] _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ Might these facts or circumstances prevent you from rendering an unbiased decision in this arbitration? [ ] Yes [ ] No If yes, please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ 9. OTHER CONSIDERATIONS Are you aware of any facts or circumstances which (1) might impair your ability to serve (including schedule availability) or (2) might create an appearance of partiality on your part in the above-captioned arbitration? [ ] Yes [ ] No If yes, please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ Signature: Date:
40-131

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Copyright 2007 Matthew Bender & Company, Inc., a member of the LexisNexis Group.

Chapter 40 UNDERSTANDING REINSURANCE

II. APPRECIATING PURPOSE OF REINSURANCE

40.04[2] 40.04[3] 40.04[4] 40.04[5] 40.05 Lack 40.05[1] 40.05[2]

III. CONSIDERING REINSURANCE REGULATION

IV. CONSIDERING INSURERS OBLIGATIONS TO REINSURERS IN CASE OF CLAIM

40.09[2][a] 40.09[2][b] 40.10

40.10[2][a] 40.10[2][b] 40.10[2][c] 40.10[2][d]

40.10[2][e] 40.10[2][f] 40.10[3]

40.10[3][a] 40.10[3][b] 40.10[3][c]

V. CONSIDERING REINSURERS OBLIGATIONS

VI. CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE FIDEI

VII. CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE SETTLEMENTS

VIII. CONSIDERING BROKERED MARKET

New Appleman Insurance Practice Guide

IX. CONSIDERING REINSURANCE ARBITRATION

40.01 Scope. In essence, reinsurance is insurance for insurance compa-

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New Appleman Insurance Practice Guide

New Appleman Insurance Practice Guide

40.03 Master Checklist.

Understand whether the reinsurance contract at issue is a facultative certicate or a treaty.

Understand whether the reinsurance at issue is proportional or non-proportional.

Understanding Reinsurance Discussion: 40.06

Understand the requirements of the reinsurance contracts notice provision.

Understand the effect of an access to records clause in the reinsurance agreement.

If your client is the ceding insurer, beware the consequences of 40-11

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disclosing privileged information to reinsurers pursuant to an access to records clause.

Understand the coverage provided by excess of policy limits 40-12

(XPL) and/or extra-contractual obligations (ECO) clauses in the reinsurance contract.

Understand the obligations of the reinsurance intermediary.

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Understand the effect of any honorable engagement wording in the 40-14

Become familiar with the forms provided by ARIAS.

APPRECIATING PURPOSE OF REINSURANCE.

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the wordings, including endorsements and amendments.

retention is $25,000, the amount ceded to the reinsurer is $125,000 40-18

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New Appleman Insurance Practice Guide

New Appleman Insurance Practice Guide

40.04[5] Fronting Arrangements. There is not a general agreement in

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Understanding Reinsurance 40.05 Lack of Privity of Contracts.

40.05[1] Know General Rule. A fundamental principle of reinsurance

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CONSIDERING REINSURANCE REGULATION.

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Example: New York similarly provides credit for reinsurance as

New Appleman Insurance Practice Guide

New Appleman Insurance Practice Guide

CONSIDERING INSURERS OBLIGATIONS TO REINSURERS IN CASE OF CLAIM.

Consider: As a practical matter, the cedent should be mindful of

any event or development which, in the judgment of the 40-37

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40.09[2][a] Jurisdictions Requiring Proof of Prejudice. Most courts

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A frequent inspection-related issue is the impasse that occurs when a

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Exception: A federal court affirmed an arbitration panels nding

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right to associate) clauses in reinsurance contracts, see 40.11 below.

use of condentiality agreements to protect a cedents privileged documents.