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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 INSURER’S OBLIGATIONS TO REINSURERS IN CASE OF CLAIM
40.09 Consider Insurer’s Notice Obligations 40.09[1] Know What Notice Clause Requires

New Appleman Insurance Practice Guide 40.09[2] Reinsurer’s 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 Reinsurer’s Right to Access Insurer’s Records 40.10[1] 40.10[2] Consider What Access to Records Clause Requires to Be Made Available to Reinsurer Consider Whether Insurer’s 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 Confidentiality 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 Reinsurer’s Ability to Compel Production of Cedent’s 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 Cedent’s 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 Insurer’s Reinsurance Information

Consider Reinsurer’s Rights Under Right to Associate Clause or Claims Control Clause

40-2

Understanding Reinsurance

V. CONSIDERING REINSURER’S 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 Insurer’s 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 Reinsurer’s Preclusion from Second-Guessing Reinsured’s 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.46 40.36 40.37 40.29 Consider Obligation to Arbitrate Neutral Panel or Party Advocate System Strict Rule of Law vs.34 40.38 40.23 40.32 40.39 40.30 40. Obligations Pursuant to Honorable Engagement Discovery in Arbitration Summary Disposition in Arbitration Reasoned Awards Know When to Move to Vacate or Affirm Arbitration Award ARIAS Forms X.41 40. CONSIDERING REINSURANCE ARBITRATION 40.44 40.31 40.33 40.S.27 40.42 40. FORMS 40.25 40.35 40.22 40.28 40.1 40-4 .45 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 Confidentiality 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.40 40.24 40.43 40. Umpire Questionnaire Sample Form 2.26 40.

stabilizing financial results in the same manner that insurance protects any other purchaser against spikes from realized financial losses. the cedent (or cedant). reinsurance is insurance for insurance compa- nies. both of which strongly influence reinsurance recoveries. all of the risks that are insured can be reinsured. “reinsured” or “ceding insurer”) because it “cedes” or transfers part of the risk. The insurer is called. 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). but need not.01 Scope.I. OVERVIEW. This chapter provides a background in reinsurance and explains how an insured’s relationship with its insurer fits within the context of the entire reinsurance scheme. Reinsurance enhances the fundamental financial 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). Reinsurance may. absent specific cash-call provisions. 40. Basically. and financing growth. the reinsurer is not required to pay under the contract until after the original insurer has paid a loss to its original insured. 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. dovetail with the scope of the original insurance. 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. for reinsurance purposes. has a language of its own. The reinsurance relationship is structured in the following manner: original insured > insurer > reinsurer. like many areas of business law. In essence. Because reinsurance is a contract of indemnity. 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. protecting against catastrophic losses. unless contrary to public policy under the relevant governing law for the reinsurance contract. There is typically no contractual relationship between the reinsurer and the original insured. The company selling 40-5 . The insurance company purchasing reinsurance is called the “ceding company” (or the “cedent” (or “cedant”). Reinsurance. The coverage afforded insurers through the most commonly purchased types of reinsurance is explained to provide a context for most reinsurance claims. The risk indemnified against is the risk that the insurer will have to pay on the underlying insured risk.

01 New Appleman Insurance Practice Guide reinsurance is called the “reinsurer”. the applicable regulatory regime may permit the cedent to count a reinsurance recoverable as a present asset on its own balance sheet.) 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. Although reinsurance contracts between different cedents and reinsurers can include clauses with similar purposes. customs and practices. where separate insurers assume shares of the same insurance risk. The reinsurance relationship is evidenced by a written contract reflecting the negotiated terms. The reinsurance contract does not change the direct.” and the company reinsuring this risk is called the “retrocessionaire. When a claim is presented. 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. these are the only parties to the reinsurance agreement. most U. ad infinitum. insurer’s responsibility to its policyholder (the “original insured” or “policyholder”). the wording of particular provisions varies significantly. Nor is it a novation as between the original insured and its 40-6 . Payments that are due pursuant to a reinsurance agreement are considered an asset of the cedent. and the insurer must fulfill the terms of its policy whether or not it has reinsurance or whether or not the reinsurer is rightly or wrongly refusing to perform. Sample clauses are provided where instructive.08 below discussing the insolvency clause]. The liability or risk ceded is called a “cession.” Retrocessions need not incorporate the original reinsurance and often do not.” and the original policy that the cedent issues to a policyholder is referred to as “direct” insurance. depending on the parties’ specific needs. reinsurance contracts include an insolvency clause. or original.S. the reinsurers respond in a predetermined order to cover the loss. in contrast to other types of contingent payments. Reinsurance should not be confused with other commercial arrangements. A layering process involving two or more reinsurance agreements is commonly employed to obtain sufficient monetary limits of reinsurance protection. A reinsurer also can purchase its own reinsurance protection. all rights and obligations run only between them. (Retrocessionaires in turn can purchase reinsurance again. However.40. Typically. and such reinsurance of reinsurance is called a “retrocession. Reinsurance is payable only after the cedent has paid losses due under its own insurance agreements.” A reinsurer that transfers all or part of its assumed reinsurance is called a “retrocedent. It is not co-insurance.

and payments by insurers in excess of policy limits or payments of extracontractual damages. A reinsurance agreement does not establish a partnership between the insurer and the reinsurer or a separate joint venture as between them. in direct-action states or in other circumstances. monitor claims. the disclosure of cedent/ reinsurer communications can potentially be detrimental to the cedent’s coverage position vis-a-vis its insured. Other common issues addressed here include the reinsurer’s obligations to indemnify the insurer for declaratory judgment expenses incurred in defending or prosecuting coverage litigation against the original insured. defenses stemming from interpretation of the reinsurance wording to the indemnity sought. 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. attempts by original insureds to sue reinsurers directly generally fail. even where. claimants against the original insureds similarly are unsuccessful in bringing suit directly against reinsurers. Reinsurance ordinarily does not confer third-party beneficiary status on the original insured. and defenses seeking rescission of the reinsurance contract including nondisclosure and misrepresentation with respect to the details of risk. Underlying claims and coverage litigation can trigger reporting and notice obligations of cedents to reinsurers. and establish claim reserves.Understanding Reinsurance 40. The nature of the reinsurance relationship — especially the notion of “utmost good faith” or uberimae fidei — 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. the claimant might be able to sustain an action against the original insurer (cedent). In some instances. Typical reinsurance claim issues that are discussed here include: reporting and notice obligations. cooperation and claimhandling obligations. there is no privity of contract between the insurance policyholder and the reinsurer. 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). Reinsurers that potentially owe indemnity may commence investigations. Absent a “cutthrough” clause or similar modification [see § 40. 40-7 .05 below for discussion of these exceptions].01 insurer or substitution of one insurer for another. In the absence of language in the reinsurance agreement granting the original insured rights against the reinsurer or unusual factual circumstances. although some pro rata contracts provide that the parties share proportionally in the premiums collected by the cedent and in losses paid by it.

02 New Appleman Insurance Practice Guide Reinsurance claims generate certain legal issues distinct from issues that typically arise in the context of direct insurance. cars and individuals.com Searches: To find statistics on reinsurance premiums. the availability and weight of legal precedent is less predictable and meaningful than in litigation in the courts. 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. in typical U. the 40-8 . Enter specific search terms or date ranges. indeed. Each reinsurance treaty or facultative certificate reflects the special needs of the parties with respect to the type and amount of risk covered. or different aspects in which one party is largely dependent upon another. To find articles on specific cases involving reinsurance.40. 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. in exchange for a ceding commission deducted from the premium collected from the direct insured. 40. 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. Rules found in insurance law in different arenas may not apply or may apply with different nuances in the context of reinsurance disputes. try this source: Reinsurance: Mealey’s Litigation Report. sometimes the cedent will 100 percent reinsure the risk undertaken to the policyholder. 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. although many include commonly used provisions and clauses sometimes required by state law. The parties to reinsurance contracts are typically sophisticated insurers transferring the financial risk assumed in insuring businesses. rather than courtroom litigation. which is ultimately passed on to the reinsurer. Enter this search: PUB(Reinsurance). homes. Lexis. arbitrations. Several important distinctions between the resolution of insurance and reinsurance disputes are examined in this chapter. in such transactions.02 Key Practice Insights.S. There are no standard reinsurance contracts. which is perhaps unique to reinsurance agreements. including the effect of the bilateral duty of utmost good faith. custom and practice. Reinsurance disputes also are distinguished by their typical resolution through arbitration. try this source: RDS TableBase. Among other differences.

02 calculation of the premium. extracontractual obligations (“ECO”). including the purposes and types of reinsurance and the financial goals and consequences typically involved. Reinsurance contracts therefore are often complex and unique and must be carefully drafted and. including insolvency. the role of the reinsurance intermediary. including endorsements and amendments. particularly the Federal Arbitration Act (“FAA”) and statutory law applicable to nonadmitted reinsurers and the availability of pre-answer or pre-judgment security. forms. Lawyers practicing in the reinsurance field must become familiar with the specialized business of reinsurance. follow the fortunes/settlements. claims control. notice. Lawyers also should know that leading industry and professional organizations offer practice guides. lawyers should be mindful of the insurer’s statutory licensing. Practitioners also must be knowledgeable about the meaning. Also of particular concern are “fronting” arrangements and cut-through endorsements. and other resources useful for reinsurance arbitrations (such as lists of professional trained reinsurance arbitrators). Reinsurance disputes are typically resolved through arbitration. which may not be allowed or may be subject to special regulations in certain jurisdictions. (Indeed. the method and timing of notice and submission of claims. counsel handling a dispute should be familiar with how reinsurance arbitrations are generally handled. Attorneys should understand how insurers must account for finite risk reinsurance. in the event of dispute. as this subject recently has attracted significant regulatory attention. 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. 40-9 .) Although regulation of the reinsurance industry in the United States is more limited than that of the insurance industry in general. excess of policy limits (“XPL”). various reporting obligations. and practitioners should be familiar with arbitration law.Understanding Reinsurance 40. Attorneys also should carefully review complete versions of reinsurance wordings. access to records. as is often the case). use and legal effect of commonly employed reinsurance contract provisions. carefully interpreted. solvency and accounting requirements. and resolution mechanisms for potential disputes. Of course. intermediary and arbitration provisions. 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.

32 □ Become familiar with specific types of reinsurance such as catastrophe reinsurance.04[4] □ Determine all of the parties’ responsibilities and liabilities in a fronting arrangement. 40-10 .04[5] □ Confirm that fronting is permissible in the jurisdiction where the arrangement is executed.40. clash cover and finite reinsurance.03 Master Checklist.04[4] □ Understand how insurers must account for finite risk reinsurance under applicable regulations. Discussion: § 40. Discussion: § 40. Discussion: § 40.04[5] □ Determine if special circumstances exist which may provide grounds for a policyholder of the ceding insurer to assert a direct action against the reinsurer. Discussion: § 40. □ Understand whether the reinsurance contract at issue is a facultative certificate or a treaty.05[1] □ Research the legality and enforceability of cut-through clauses (or assumption of liability endorsements) contained in insurance contracts covered by reinsurance.04[1] □ Understand whether the reinsurance at issue is proportional or non-proportional. Discussion: § 40.04[2] Forms: §§ 40. Discussion: §§ 40.30-40. including any obligation to monitor a managing general agency.03 New Appleman Insurance Practice Guide 40.04[3]-40.05[2] □ Understand the credit for reinsurance laws governing your reinsurance transaction. Discussion: § 40. Discussion: § 40.

39 □ If your client is the ceding insurer.09[1] Forms: §§ 40. on the rights and obligations under the reinsurance agreement. Discussion: § 40. or any applicable common law or statutory set-off rights.03 □ Confirm that a letter of credit obtained by a ceding company that intends to take financial statement credit for reinsurance placed with a non-admitted reinsurer complies with statutory requirements. Discussion: § 40.34 □ Understand the effect of an offset clause.Understanding Reinsurance Discussion: § 40. Discussion: § 40. Most states require that the reinsurance contract include an insolvency clause for the ceding insurer to take credit for reinsurance on its financial statement. Discussion: § 40. the reinsurer must demonstrate prejudice in order to successfully assert a late notice defense. in your jurisdiction.09[2] □ Understand the effect of an access to records clause in the reinsurance agreement.38 □ Determine whether.36-40.10[1] Form: § 40. beware the consequences of 40-11 .06 40. Discussion: § 40.08 Form: § 40. Discussion: § 40.07 □ Ensure that an adequate insolvency clause is included in the reinsurance contract if required in your jurisdiction.08 Form: § 40.35 □ Understand the requirements of the reinsurance contract’s notice provision.

40. Discussion: § 40.11 Forms: § 40.10[2][f] □ Understand the circumstances under which a reinsurer can compel disclosure of its cedent’s privileged communications. Discussion: § 40. Discussion: § 40.10[4] □ Become familiar with the rights and obligations presented by right to associate and claims control clauses in reinsurance contracts. Discussion § 40.10[3] □ Understand the circumstances under which an insured will be entitled to discover its insurer’s reinsurance information.41 □ Draft the reinsuring or business covered clause of the reinsurance agreement carefully to avoid disputes concerning the scope of coverage.13 □ Understand the coverage provided by excess of policy limits 40-12 .12 □ Understand whether the reinsurance contract wording (in many cases the definition of “allocated loss expenses”) obligates the reinsurer to reimburse its cedent for declaratory judgment expenses. Discussion: § 40. Discussion: § 40.10[2] □ Determine whether the parties to a reinsurance contract should execute a confidentiality or common interest agreement to try to preserve applicable privileges or immunities against disclosure to third parties. Discussion: § 40. Discussion: § 40.10[2] □ Research the applicability in your jurisdiction of the common interest doctrine to a cedent’s disclosure of privileged communications to its reinsurer.03 New Appleman Insurance Practice Guide disclosing privileged information to reinsurers pursuant to an access to records clause.

Discussion: § 40.03 (“XPL”) and/or extra-contractual obligations (“ECO”) clauses in the reinsurance contract. Discussion: § 40. Discussion: § 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 cedent’s allocation and aggregation decisions as respects it direct insurance obligations.14 Forms: §§ 40.21 Form: § 40. Discussion: § 40. ensure that all proper and businesslike steps are taken in underwriting the underlying business and in settling claims.15 □ If your client is the cedent.18-40.43 □ Understand the duty of utmost good faith that is central to the relationship between cedent and reinsurer. Discussion: § 40. the reinsurer.15 □ If your client is the cedent. Discussion: § 40. Discussion: § 40.Understanding Reinsurance 40.44 40-13 .42-40. the reinsurance broker or intermediary is the agent of the ceding company. and for what purposes.17 Cross References: §§ 40.19 □ Understand the obligations of the reinsurance intermediary.16[2] □ Understand the effect of follow the fortunes or follow the settlements wording in the reinsurance contract. Discussion: § 40. determine the facts that must be disclosed during the underwriting process.20 □ Determine whether. or both parties.

45-40.45 □ Consider what procedures should be included in the arbitration provision concerning the selection of arbitrators and/or umpires.45-40.46 □ Arbitration counsel should consider whether non-signatories to the arbitration agreement may be forced to arbitrate.47 □ Understand the effect of any honorable engagement wording in the 40-14 . Discussion: § 40. Discussion: § 40. Discussion: § 40.23 Form: § 40.22 Form: § 40.03 □ New Appleman Insurance Practice Guide Understand what disputes are arbitrable under the reinsurance contract’s arbitration clause. what qualifications the arbiters should have. and whether the arbiters should be neutral or non-neutral. Discussion: § 40. counsel should determine whether the scope of the arbitration clause in the reinsurance contract is intended to be broad or narrow.22 Forms: §§ 40.22 □ Consider whether or not to include consolidation and joinder provisions in an arbitration agreement.40.23 □ Become familiar with the standards and procedures for selecting arbitrators and the lists of qualified individuals published by arbitration and reinsurance organizations.23 □ Make certain that your client appoints its arbiter on a timely basis. or whether to request consolidation once arbitration has commenced.46 □ In drafting reinsurance agreements. Discussion: § 40. Discussion: § 40.22 Forms: §§ 40. Discussion: § 40.

whether they should incorporate any procedures published by reinsurance or arbitration organizations. Discussion: § 40.28 □ Become familiar with the forms provided by ARIAS.46 □ Counsel drafting a reinsurance contract should determine whether specific discovery procedures should be included in the reinsurance contract’s arbitration provision and.Understanding Reinsurance 40.28 □ Arbitration counsel should consider whether there are grounds to request a court to modify or correct an arbitral award.47 40-15 .26 □ Arbitration counsel should consider whether to move to confirm a favorable arbitration award in court. Discussion: § 40. Discussion: § 40. Discussion: § 40.25 □ Arbitration counsel should consider whether to submit a motion for summary disposition of a reinsurance claim or dispute. Discussion: § 40. Discussion: § 40. Discussion: § 40.29 Form: § 40.03 reinsurance agreement. Discussion: § 40.24 Form: § 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. if so.28 □ Arbitration counsel should consider whether grounds exist to move to vacate an arbitration award in court.

the reinsurer reserves the “faculty” to accept or decline all or part of any insurance policy presented. 2. A treaty reinsurer may purchase facultative reinsurance to protect itself and its treaty reinsurers. The reinsurer and cedent negotiate the terms for each facultative certificate.) Other uses of facultative reinsurance include: 1.II.” Facultative reinsurance is a contract only covering all or part of a single specific policy of insurance. involves a preexisting commitment by the reinsurer to cover a predetermined class and amount of coverage that will be sold by the insurer-cedent.04 Types of Reinsurance. the wording of the facultative certificate will make this clear. 4. Unless there are contract terms to the contrary. Treaty. discussed further below. Facultative reinsurance is commonly purchased for large. (“Treaty” reinsurance. other times facultative coverage also inures to the benefit of the treaty reinsurers. For each transaction sought to be reinsured. APPRECIATING PURPOSE OF REINSURANCE. whether the facultative reinsurance inures to the benefit of the treaty reinsurers will depend on whether the treaty reinsurers paid a portion of the premium for the facultative 40-16 . 3. There are two basic types of reinsur- ance: “treaty” and “facultative. When an insurer is offered a risk that exceeds its standard underwriting or reinsurance limits for that class. 40. unusual or catastrophic risks. and the cedent chooses whether to secure reinsurance for a particular policy. Ideally.04[1] Facultative vs. facultative reinsurance can permit the ceding company to accept the risk. the facultative reinsurance will perform first and completely before any of the treaty reinsurance performs. Insurers can fill gaps in coverage caused by reinsurance treaty exclusions by seeking separate facultative coverage for a specific 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. Sometimes the facultative reinsurance only applies to the ceding company’s net retention. Insurers sometimes purchase both facultative and treaty reinsurance to cover the same risk. As a general matter. Reinsurers thus must have the necessary resources to underwrite individual risks carefully. 40.

g. Mass. treaties sometimes are renewed automatically unless a change in terms is requested. Cross Reference: For a thorough discussion of the distinction between facultative and treaty reinsurance. coverage for loss adjustment expenses.. amounts of the policy ceded and retained. tax. net retention. the type of treaty (proportional or non-proportional). 1993).Understanding Reinsurance 40. offset and intermediaries.. New England Reinsurance Corp. aff’d in part and rev’d in part. covers some portion of a defined class of an insurance company’s business (e. insolvency. an insurer’s products liability or property book of business). These changes may be retroactive to contract inception or have a different effective date. neither the cedent nor the reinsurer has the “faculty” to exclude from a treaty a risk that fits within the treaty terms. the underlying policyholder and policy number reinsured. 825 F. Treaty relationships are often long-term. 57 F. the type of reinsurance (proportional or nonproportional) and the premium. Many facultative certificates do not include an arbitration provision [see § 40. z Strategic Point: Reinsurance treaties that run consecutively for many years can present certain difficulties in terms of claims processing. If not.3d 56 (1st Cir. 370 (D. in most cases. treaty reinsurers rely heavily on the cedent’s underwriting. A typical treaty can include thirty or forty articles or clauses which describe the class or classes of business covered. Thus. The front of a typical contract identifies the parties. Treaty reinsurance. cancellation.04[1] coverage.22 below for a discussion of arbitration clauses in reinsurance agreements]. 1995). Facultative certificates are often one or two page documents. change premium or ceding commission rates or add. Practitioners evaluating indemnity under reinsurance treaties must take care to review complete versions of 40-17 . Reinsurance treaties cover all of the risks written by the ceding insurer that fall within their terms unless exposures are specifically excluded. Contracts are often amended by endorsements which can add or delete reinsurers. delete or alter important contract terms. the amount of reinsurance provided and details about the parties’ obligations with respect to treaty operation. see Compagnie de Reassurance D’Ile de France v. The back of each certificate usually contains the following provisions: notice of loss. Therefore. the facultative reinsurance likely will not inure to the treaty reinsurers’ benefit. the most common form of reinsurance. Supp. claims handling.

000. the reinsurer assumes an agreed percentage of each risk from the first dollar.. For example. and the reinsurance may or may not apply from the first dollar (i.000 40-18 .” Although it is not a partnership.” and the portion that the cedent keeps is referred to as the reinsurance “retention.e. including endorsements and amendments. quota share reinsurance presents a greater identity of interests between the ceding insurer and the reinsurer than does excess of loss reinsurance (discussed below). even though only the cedent has contractual privity with the direct insured. but differs in that the portion of the reinsured policy the direct insurer retains is expressed as a fixed monetary amount. Non-proportional. According to the percentage agreed. The portion of the risk that the reinsurer assumes is called the “ceded risk. Examples: Where the policy limit is $150. and the reinsurer agrees to pay the same pro rata portion of any loss and expense incurred by the cedent.04[2] Proportional vs. 40. Under quota share reinsurance. Surplus share is similar to quota share reinsurance in that premiums and losses are shared on a proportional basis.04[2] New Appleman Insurance Practice Guide the wordings.40. and the cedent’s retention is $25.000. and the reinsurer indemnifies 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”). the cedent would bear $60 of that loss and the reinsurer concurrently would bear $40 of that loss. which effectively co-venture in relationship to their relative shares of the risk. Premium is shared based on the ratio of retained liability. Proportional reinsurance spreads the risk of loss and creates a broad identity of interests between the cedent and the reinsurer. The two most common types of proportional reinsurance are “quota share” and “surplus share” reinsurance. The cedent pays the reinsurer a predetermined share of the premium. Proportional or pro-rata reinsurance is characterized by a proportional division of liability and premium between the ceding company and the reinsurer. the cedent and reinsurer share the premium and losses from the business reinsured. if there is a $100 loss under a 40 percent quota share reinsurance contract. up to any limit assigned. the reinsurance may apply only in excess of the fixed 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). The percentage always reflects the percentage of loss borne by the reinsurer. the amount ceded to the reinsurer is $125.

Under non-proportional or excess of loss reinsurance (sometimes referred to as “XL” or “XOL”). the reinsurer owes nothing. the cedent is responsible for $16. these variations make a surplus share contract more difficult to administer than a simple quota share. there is a great deal of uncertainty with this coverage. premiums may 40-19 . from risk to risk. because the level of risk under non-proportional reinsurance depends on the nature of the reinsurance undertaking. However. reinsurers must consider the layer of coverage on which it will participate.04[2] and the ratio of what is ceded to what is retained is 5:1.000. Excess of loss reinsurance can be provided on an individual risk. For example. so it has some protection for even the smallest losses. called the “retention. the proportion of premium and liability ceded can vary. In contrast. In such cases. XOL reinsurers may incur a disproportionate share of total losses. if the cedent expects to have infrequent losses at significant levels or wishes to guard against risk of a significant loss. z Strategic Point — Reinsurer: Because non-proportional reinsur- ance is characterized by unpredictability and potentially high losses. if the cedent expects to incur frequent losses at low levels.667 and the reinsurer pays five times more.333. In addition. Whether a potential cedent seeks to obtain or place coverage on a first dollar basis versus excess of loss reinsurance depends on several factors. 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.” If losses to the ceding company are less than the retention. and is typically placed in layers. Although it can be advantageous for the direct insurer to vary the percentage of premium and liability ceded for each risk. it may choose to purchase excess of loss coverage. or $83. including the cedent’s anticipated loss profile. the reinsurer’s liability is not triggered until the cedent’s losses exceed a specified monetary amount. Non-proportional reinsurance tends to cost less than does quota share reinsurance because the reinsurer does not participate in every loss. In addition to the underlying risk. an occurrence or an aggregate basis. Losses therefore will be shared in that proportion. The reinsurance agreement will include a limit of liability for each claim above which the reinsurer is not obligated to pay. at the cedent’s option.Understanding Reinsurance 40. it may make economic sense for the cedent to secure quota share reinsurance. For a loss of $100. in surplus share reinsurance contracts.

see § 40. Catastrophe reinsurance is a form of excess of loss reinsurance which. see § 40. 40-20 . see § 40. Cross References: For an example of a reinsuring clause for a quota share reinsurance agreement.31 below.” which requires two or more coverages or policies issued by the reinsured to be involved in a loss.” 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). Clash covers are often catastrophe covers.04[3] New Appleman Insurance Practice Guide be received long before liability is manifested or developed. for coverage to apply. indemnifies 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. and liability may be difficult to estimate because it is determined by the prevailing legal or economic environment in the future.3.04[3] Catastrophe Reinsurance. and errors and omissions. even an unexpected number of such losses within the reinsurance policy term. see Eric Mills Holmes. products liability. 40. Catastrophe cover is typically secured to protect the cedent against an intolerable accumulation of actual loss and to stabilize its underwriting experience. each of which may stem from different direct insureds but which altogether arise from a common event (or closely related series of events). (On the other hand. This reinsurance typically attaches above the limits of any one policy.32 below. the reinsurer is able to hold on to the premium paid by the cedent for a longer period. Appleman on Insurance 2d § 102. catastrophe coverage principally provides protection for the cedent against the concentration of several losses. The reinsurance contract is typically called a “catastrophe cover. For an example of a reinsuring clause for a surplus share reinsurance agreement. Rather than single large losses. Cross Reference: For discussion of the advantages and disad- vantages of proportional and non-proportional reinsurance contracts. subject to a specific limit.30 below. For an example of a reinsuring clause for an XOL reinsurance agreement. offering it the opportunity to “earn out” losses through investment return. Another variant of reinsurance purchased by insurers is “clash cover.40.) Examples of long-tail lines of insurance include malpractice.

Finite risk transactions are legitimate and widespread. it is a form of reinsurance that carefully controls and limits the amount and type of risk transferred to the reinsurer. 4. 2. Finite risk reinsurance contracts are typically treaties that are closely tailored to meet the particular needs of a cedent. see Eric Mills Holmes. a return premium from the reinsurer. Broadly speaking. rather than all at once. Inclusion of a commutation clause that allows for profit sharing between the cedent and reinsurer based on the financial results of the reinsurance contract. Finite risk reinsurance contracts often include some or all of the following: 1.04[4] Finite Reinsurance. 3. but often involves the transfer of money. An explicit recognition of the time value of money through the use of experience accounts funded by large reinsurance premiums. A ceiling on the amount of underwriting risk assumed by the reinsurer. to the cedent as a result of how losses developed under the reinsurance contract.Understanding Reinsurance 40. Participants in finite risk reinsurance transactions tend to focus primarily on financial risks. which accumulate investment income over time and fund the loss payments. Multi-year contracts that allow the cedent to mitigate volatility by recognizing a loss gradually. 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).” the risk that the amount of losses will exceed premiums. though some forms of transactions have been criticized as being in substance 40-21 . such as timing risk (the risk that losses will need to be paid sooner than expected). They can be quota share or excess of loss treaties and may cover losses that have yet to be quantified 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 reinsurance can be distinguished from other non-finite or “traditional” types of reinsurance based on the extent to which there are limitations on the “underwriting risk. Appleman on Insurance 2d § 102. 40.3[B][2]. There is no generally accepted definition of finite risk (sometimes called “financial”) reinsurance.04[4] Cross Reference: For discussion of the typical terms of catastrophe cover.

and other law-enforcement officials with jurisdiction.1. Insurers and reinsurers in the United States and elsewhere have been investigated by the SEC.04[4] New Appleman Insurance Practice Guide distinguished loans but which as something other than a loan obtains more favorable tax or accounting treatment (until challenged). If not. Example: Effective in 2006 and 2007. state Insurance Departments. the contract can be accounted for as reinsurance. and the new requirements demand substantial and ongoing management attention. state Attorneys General. A common element in many of the finite 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. (2) the contract was accounted for as reinsurance and not as a deposit. They were instead allegedly intended only to achieve a particular result on a company’s balance sheet — what is sometimes referred to as “financial engineering” or more commonly “smoothing” of earnings. the National Association of Insurance Commissioners (“NAIC”) amended the disclosure requirements for companies that purchase finite risk reinsurance. then contract deposit accounting is appropriate. t Warning: Significant regulatory attention has recently been directed at how insurers account for finite 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. under Interrogatory 9. and (3) the contract has one or more of the following features “or other features that would have similar results”: 40-22 . For example. to mislead investors and regulators as to the true financial condition of the cedent).40. If there has been sufficient risk transfer. 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. The key issue is how to account for the transaction. 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 identified as prone to abuse and which warrant closer review. when in fact the transactions did not do so and thus were more in the nature of loans or deposits on account. or so the argument goes.

(b) a brief discussion of the principal objectives and “economic purpose” for entering into the contract. Cessions by or to affiliates.Understanding Reinsurance 40. In the event conditions (1). including multiple contracts with the same reinsurer or its affiliates. the reporting company must provide certain supplemental information including: (a) a summary of the terms of the responsive contracts. or (2) twentyfive percent or more of the written ceded premium has been retroceded back to the ceding company in a separate reinsurance contract. accumulating retentions from multiple years or any features inherently designed to delay timing of cedent reimbursement (e. payment schedule. unless triggered by a decline in the counterparty’s credit status. 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. based on its most recent financial statement.04[4] • • • • • • non-cancelable contract terms longer than two years. 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. An additional interrogatory (9. A second interrogatory (9.g. are included in determining if the conditions are met. If either condition 1 or 2 of this interrogatory is met. (2) and (3) are satisfied. Here. experience accounts).2) is intended to ferret out additional arguably abusive reinsurance arrangements. and (c) the aggregate financial statement impact of all such contracts on the balance sheet and income statement. the reporting company must provide the same supplemental information noted above. a provision permitting reporting or payment of losses less frequently than quarterly. an unconditional or unilateral right by either party to commute.4) requires the cedent to identify 40-23 . aggregate stop loss reinsurance coverage.

for “all reinsurance contracts for which the reporting entity is taking credit on its current financial statement. . Consider: Note that this regulatory purpose is not to preclude participants from making ill-considered. 1. 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”). perhaps even including prior employees. preferably concurrent to entry into the reinsurance contract in question.or misfeasance. 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.” This prong of the attestation applies to every reinsurance contract. that would “under any circumstances reduce. 1994. mitigate or otherwise affect any actual or potential loss to the parties.” The attestation includes the following four parts. underpriced. 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. Companies and their auditors should develop a plan for accomplishing this review and documenting its methodology and results. 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. written or oral. or even foolish deals — shareholders may have other recourse for such non. there is documentation evidencing proper accounting treatment under SSAP 62.40. renewed or amended after January 1. For reinsurance contracts entered into.04[4] New Appleman Insurance Practice Guide contracts that it has accounted for as reinsurance for statutory accounting purposes yet accounted for as a deposit for GAAP purposes (or vice versa). an explanation for the differing treatment must be provided in a supplemental filing. for which risk transfer is not reasonably considered to be self-evident. instead. preservation of the integrity of the largely self-reported financial and insurance regulatory systems is meant to be buttressed through these disclosure requirements. the NAIC recognizes that risk transfer 40-24 2. and not just to those that may be characterized as “finite” in nature or appearance. No side agreements exist. For any such contract. limit. which share in the common objectives to encourage transparency and auditability for reinsurance transactions of certain forms and to memorialize.

fronting involves the reinsurance of all or substantially all of a book of business. lawyers and independent auditors. Companies will want to obtain guidance from counsel and auditors as to what constitutes sufficient “risk transfer analysis” in today’s environment. 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. any contract reportable under the conditions delineated will be subject to this prong of the attestation. even though the real party in interest — with underwriting expertise and per the reinsurance contract financial exposure vis-a-vis the cedent/ front — is the reinsurer. In many fronting arrangements. what constitutes sufficient due diligence to establish compliance with all of the risk transfer and accounting requirements of SSAP 62. 40. Sometimes. In terms of which contracts have reasonably self-evident risk transfer. There is not a general agreement in the reinsurance industry as to how fronting is defined. 40-25 . Some companies will have sufficient controls already in place. There is disagreement as to what extent responsibility for monitoring the MGA and responsibility for the MGA’s misdeeds lies with cedent or reinsurer. Certainly. 3. however.Understanding Reinsurance 40. The reporting entity complies with all 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. perhaps based on consultation with accountants. a managing general agency (“MGA”) underwrites the business and handles claims on the reinsured policies. 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. the ceding company may want to look back to the Interrogatories.04[5] Fronting Arrangements. and there are varying perceptions of whether the general duties and relationships between cedent and reinsurer change in the context of a “fronting” arrangement. others will need to develop such controls and put them in place as soon as possible. 4. It is clear. At a minimum.04[5] analysis may not have been memorialized contemporaneously.” Each company will determine. This deceptively simple sounding prong will require the careful exercise of “due diligence. This prong is the key to the ability to make the CEO/CFO attestations on an ongoing basis.

Re-Insurance Co. 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. 818 (Ohio Ct. Co. v.3d 641. 183. lacking privity with the direct insured. Inc. 183.40.04[5] New Appleman Insurance Practice Guide that a fronting insurer remains contractually liable to perform with respect to its insureds under the direct policies.Y. ex gratia or gratuitous payment for which indemnification under the reinsurance arrangement is not owed. At the same time.. A licensed reinsurer can front for an unauthorized reinsurer or a reinsurance syndicate. 12 F. It should be noted that fronting can be done as a retrocession also. 1993)]. 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. Co. 40-26 . v. 813 F.Y. at least without security. 1993).E. Transnational Ins.2d 816.N. 481. Re-Insurance Co. 128 n. Equity Diamond Brokers. v.D. Supp. 1994) (applying North Dakota law)]. v. Special Risk Ins.. Supp.. Delta Am.. v. 484 (S. 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. Supp. 1993)].06 below for a discussion of credit for reinsurance]. Life Ins. for the reinsurer may assert that the payment to the direct insured was never owed in the first place under the direct insurance policy and thus represents an uncovered.. 2003)]. The reinsurer. Co.D. App. Vaaler Ins. Co. 836 F. whether or not it is indemnified by its reinsurer [Am. Am. and that there are no specific regulations that are relevant to their arrangements.D. Co.N. Delta Am.1 (8th Cir. 836 F. 2000). Special Risk Ins. Consider: Parties should confirm that fronting is allowed in their jurisdiction. Union Sav. N. Miss. 224 F. 185 (S. Fronting allows ceding insurers to receive reinsurance credit that would not be available. Co. Central Life Ins. fronting allows alien insurers to accept 100 percent of the exposure on risks it is prohibited by regulatory restrictions to write directly [Gallinger v. to permit the ceding insurer to take credit for the reinsurance without need for security [Am. 185 (S. 642 (7th Cir. In some instances. 785 N. if the reinsurance was issued directly by an unauthorized reinsurer [see § 40. Shriver.3d 127. 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.

05[1] Know General Rule. 2001 U.2d 48 (Cal. Prudential Reinsurance Corp. 469 A.E.. Ct. 1237-38 (Pa. citing Stickel v. Co. 1983)]. 453 F. LEXIS 10913 (N. In another case. it is not a co-signer of the policy issued to the original policyholder. v.2d 1030 (Pa.2d 1196. where a court has characterized the original policyholder as a third-party beneficiary of the reinsurance arrangement. in the bankruptcy context.. App. & Sur. and left responsibility for claims handling and funding to the reinsurers [Koken v. Ohio 2001). the court found that an insured had third-party beneficiary 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.Understanding Reinsurance 40.. particularly arising out of the insolvency of the direct insurer/cedent. Ct. Ruffin. Co. 638 A. 831 A. Co. A fundamental principle of reinsurance is that the reinsurer ordinarily is not liable to the original policyholder of the ceding insurer. 1972) (applying Georgia law). For example. 1339-40 (N. Superior Court (Garamendi).05[1] 40. Co. and it is not jointly and severally obligated to make good on the benefits the policyholder sought to obtain under the insurance contract sold by the insurer/cedent.2d 1333. Zucker. 1992)]. of Am. Dist. Excess Ins.D.S. 40. Commw. Travelers Cas. 23 N. 121 F. 1997) (applying Texas law). Ry-Ron. Facher & Zucker. 690 (5th Cir. Moreover. Prudential Reinsurance Co. 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.. 40-27 . reinsurers were considered to be the true risk bearers where the ceding insurer merely acted as the fronting company. bore no underwriting risk.2d 687. underlying claimants. Exception: While the rule of lack of privity is generally respsected by the courts. 2003)]. Div. most courts have rejected claims brought by original policyholders against reinsurers based on agency and third-party beneficiary theories [Aetna Ins.05 Lack of Privity of Contracts. Legion Ins. 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 beneficiaries. there have been some cases. v. Reid v. Co. Inc.3d 198 (5th Cir.J. Super. 842 P. v. at least insofar as the particular policy or particular insurance program is concerned. 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. or any third parties [Barhan v.2d 839 (Ohio 1939).. Glens Falls Ins.

Co. Hartford Fire Ins. Anchor Wate. 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. Co. 1989)]. Similarly. Cross Reference: For a general discussion of a reinsurer’s potential liability to the policyholder of the ceding insurer. which effectively is the consensual substitution of the reinsurer for the cedent as the agent for performance. Stern v. 932-33 (W.05[2] Consider Cut-Throughs. at *40-41 (D. see Eric Mills Holmes. 2d 1338. v. 2005)]. 354 F. Mo..7. a federal district court in New Jersey rejected the policyholders’ assertion that a reinsurer’s 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. 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. 928. [See § 40. 40. 731 F. Supp. it can be conceived of as an express grant of third-party beneficiary status of the putative non-party direct insured.40. However a federal district court in Missouri rejected the theory that a reinsurer’s conduct in paying claims alone can make the reinsurer liable directly to the original insured [Allendale Mut. 2007 U. 2007)]..D. Ins. One difference between a cut through and an assumption arrangement. A cutthrough is similar to an “assumption reinsurance” arrangement. A significant 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. Appleman on Insurance 2d § 106.05[2] New Appleman Insurance Practice Guide 1994)].N. A cut-through provision gives an insured a contractual right to pursue a direct action against the reinsurer.J. Crist. 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 insurer’s liability. at the insured’s election.D. is that cut 40-28 .04[5] above for a discussion of fronting arrangements].S. Fla. 1341-42 (S. Dist. Supp. For example. LEXIS 19060. 2006 UT 6]. 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. SCOR Reinsurance Corp.

Cir. 40-29 . Centennial Ins. Mutual Fire.Y. Exception: Cut-through endorsements that interfered with admin- istration of an insolvent insurer’s estate were found to be unenforceable [Colonial Penn Ins. Cross Reference: For a discussion of cut-through endorsements and related contract provisions. Sun Indem. Supp.N. v. LEXIS 17552.D.. 531 Pa. 847]. Prudential Reinsurance Co. Dist. This right has been recognized by many courts as well [Martin Ins. Inc. however. 598. v.. 1134 (S. Klockner Stadler Hurter.2[B][1]. Bruckner-Mitchell. Ins. Co. 1992 U. v.Understanding Reinsurance 40. t Warning: Cut-through endorsements are unenforceable under Bermuda law [Dunlop Pneumatic Tire Company Ltd. v.C. Appleman on Insurance 2d § 167. N. that is. [Cal. Code § 922.2d 434. Inc. Code § 493. 444 (D. 1990)]. Code § 1308(a)(2)(B). Co.C. v. 1130. note that since the assumption takes place on only one side of the transaction.Y.2d 252-53 (5th Cir. Marine & Inland Ins.S. Ins.” freeing the original contracting party from its contractual duties. 82 F. 1936). Many state statutes permit reinsurers to enter into cut-through endorsements. and assumptions occur when the cedent effects a lossportfolio transfer to a reinsurer by which the reinsurer steps into its shoes inter sese. when the policy is placed. 1990) (interpreting Louisiana law).. 785 F. Ins.2. which is why the direct insured often will be permitted to elect to pursue either the original party in privity or the assumption reinsurer. discussing Foster v. Agency.D. Co. Tex. Ltd. Ltd. Am. at *15-18 (S. it is not a “novation. Selfridge & Co. Co.N. 1992).Y. 614 (1992)]. 910 F.. see Eric Mills Holmes. Co.05[2] throughs more often are agreed ex ante. [1915] A. Insurers and reinsurers should carefully research the legality and enforceability of cut-through clauses before using them. it is not fictive. The assumption must be an explicit written assumption of liability to the original policyholder who acquires a direct right of action against the reinsurer. Ins.055]. of Pennsylvania.

S. tit. In these circumstances. This requirement is satisfied if the reinsurer maintains certain trust deposits for the protection of all of its U. most states require that the reinsurer be licensed or accredited in the same state where the direct insurer does business. case reserves. Comp. unearned premium reserve and reserve for allocated loss adjustment expenses (“LAE”)) by means of a clean letter of credit issued or confirmed by a financial institution approved by the state insurance commissioner [see § 40. it can increase its “surplus” and thus expand its allowed capacity to write new insurance business. incurred but not reported reserves (“IBNR”). & Regs. Where an insurer can take credit for reinsurance. reinsurer funds held by the cedent as security (“funds withheld”) or other approved mechanisms also may be viewed as 40-30 . Alternatively. cedents. Most states also allow credit for reinsurance ceded to a nonUnited States reinsurer that maintains a trust fund in the U. ceding insurers.06 Credit for Reinsurance. Ceding insurers typically secure the payment of reserves on reinsured liabilities (i.06 below for a discussion of letters of credit]. In order to qualify for financial statement credit. CONSIDERING REINSURANCE REGULATION.S.6]. These laws determine the circumstances in which a ceding insurer can take financial statement credit for reinsurance recoverables as an asset and as a reduction of its unearned premium and loss reserves on account of reinsurance ceded.S. 40. Some states also require that the reinsurer assume all credit risks of any intermediary receiving payments [N. the ceding insurer. Exception: A significant portion of the reinsurance in the U.e. Credit for reinsurance laws constitute a key component of the regulation of reinsurance in the United States. The ceding company can reduce its balance sheet liabilities by an amount equal to the collateralization. A ceding insurer can still take credit for reinsurance ceded to unlicensed or unaccredited reinsurers if the recoverables are adequately collateralized.Y. § 125. the reinsurer can provide individual cedents with collateral. 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 insurer’s state of domicile. 11. is ceded to unlicensed alien reinsurers that are not regulated for solvency in any state.S.. Trust funds.08 below for a discussion of the insolvency clause]. the reinsurance contract must actually materially transfer risk from the cedent to the reinsurer and include an insolvency clause [see § 40. the reinsurer is the applicant requesting the bank to issue the letter of credit in favor of the beneficiary. In addition. for the protection of its U. Codes R.III.

” which cover the following three general topics: (1) the ceding company’s accounting for reinsurance on its financial statements. (2) requirements applicable to the form and content of reinsurance agreements. Example: The State of California recently adopted a comprehensive set of regulations. Credit for reinsurance secured by a single beneficiary trust. referred to as the “Reinsurance Oversight Regulations. however.3]. Comp. The NAIC has issued a recommended credit for reinsurance model law and regulation. 40-31 . trusts of otherwise unauthorized reinsurers and licensed reinsurance intermediaries. The regulations contain detailed requirements for licensed insurers intending to receive credit for reinsurance on their financial statements. specifically: • • • • • • Credit for reinsurance ceded to admitted insurers and accredited reinsurers. In addition. and (3) oversight of reinsurance transactions and related sanctions.S. Transfer of risk for both life and disability and property and casualty business.Understanding Reinsurance 40. Credit for reinsurance required by law. tit.S. or funds withheld.06 collateral sufficient to permit credit for reinsurance [N. The requirements are intended “to elicit from insurers a true exhibit of their financial condition and to safeguard the solvency of licensees” and apply to all insurers licensed or accredited in California. are currently under review by the National Association of Insurance Commissioners (“NAIC”) and the federal government. requirements for risk transfer and requisites for reinsurance arrangements. Appleman on Insurance 2d]. Many of these rules. trust. § 126.Y. regulations and financial statements in order to achieve substantial similarity of state laws and procedures in key areas of solvency. Codes R. & Regs. Example: The NAIC develops model laws. all approved U. 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. 11. a letter of credit. 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. including. Credit for reinsurance of foreign insurers. Credit for reinsurance secured by an approved U. including credit for reinsurance.

The “Asset or Reduction from Liability” section of the NAIC’s Model Law on Credit for Reinsurance. to the extent allowed by the superintendent on the basis of the insurer’s compliance with the conditions of any applicable regulation.Y. §§ 2303-2303. (ii) from an accredited reinsurer . Law § 1301].33 below. Ins. the ceding insurer” [N. Cross Reference: For an example of an unauthorized reinsurance clause applying to reinsurance ceded to an unauthorized reinsurer.25]. Sometimes. there may be allowed as admitted assets of such insurer. see § 40. Example: New York similarly provides credit for reinsurance as follows: “§ 1301. . 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. and under the control of. tit. sets forth the requirements for collateralization of recoverables from non-admitted reinsurers.07 New Appleman Insurance Practice Guide • • Contract requirements for statement credit. 40. Code Regs. reinsurance contracts require licensed reinsurers to post letters of credit. in the full amount thereof. adopted in the same or an equivalent form by most states.06 above for a discussion of letters of credit as security under credit for reinsurance laws].07 Letters of Credit. 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. unless otherwise specifically provided in this chapter. However. . 10. 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 financial statements [see § 40. and Requirements regarding the form of reinsurance arrangements [Cal. The NAIC provision stipulates that letters of credit securing the 40-32 . 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. Admitted assets (a) In determining the financial condition of a domestic or foreign insurer or the United States branch of an alien insurer for the purposes of this chapter. except from a captive insurance company licensed pursuant to the provisions of article seventy of this chapter.40.

irrevocable. 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.” requiring the financial institution to provide notice prior to expiration [Model Law on Credit for Reinsurance.2].Y. settlement and de40-33 . tit. 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 beneficiary 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. 40. Although reinsurance agreements are indemnity contracts.Understanding Reinsurance 40. even if the cedent has not paid its original policyholders. be issued. 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 beneficiary prior to expiry date for nonrenewal. unconditional and “evergreen. Codes R. contain a statement that it is not subject to any agreement. Comp. 11. 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. § 79.08 payment of reinsurance obligations must be issued or confirmed by a qualified U. Section 23 (2003)].08 Insolvency Clause. The liquidator of the estate assumes the insurer’s rights and obligations under the reinsurance agreement. including the reporting. Section 11A (July 2003)]. and state that it is subject to and governed by New York law [N. contain a statement that identifies the beneficiary. financial institution and be clean. condition or qualification outside of the letter of credit. 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. they usually include an insolvency clause which alters the indemnity nature of the contract when the ceding insurer becomes insolvent.S. Among other things.. presentable and payable at an office of the qualified bank in the U. a rehabilitator or liquidator under the direction of the domiciliary state’s insurance department takes control of an insurance company that is determined to be insolvent. an acceptable letter of credit must: be irrevocable. be clean and unconditional. & Regs. 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. In most states.S.

Code § 922. Ins.08 New Appleman Insurance Practice Guide fense of claims. Therefore. see also § 40. and can promptly discharge the insolvent insurer’s obligations to claimants. Mass. As a result. Ann. (2) the liquidator must provide notice of the pendency of a claim. Ins. and (5) the reinsurance proceeds are payable to the liquidator with statutory exceptions (i. receiver or statutory successor in the proceeding where the claim is adjudicated [N. The Law of Reinsurance Claims 254 (1992)].2. Reinsurance Practices. Vol.. Law § 1308[a][2].06 above which discusses the advantages of obtaining credit for reinsurance]. 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. 40-34 . There are generally five key provisions included in the insolvency clause: (1) there is no diminution of the claims paid by virtue of the cedent’s insolvency. 1990)]. reinsurers often monitor liquidators to ensure that they handle claims properly until a full settlement is concluded. Ins. Laws ch.e. 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 financial statement unless the reinsurance contract contains an insolvency provision [Cal. cut-throughs) [Robert C. Hammesfahr and Scott W. Cross Reference: For an example of a standard insolvency clause. 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.Y. z Strategic Point — Reinsurer: There can be a tension between the liquidator’s interests and those of the insolvent company’s reinsurers. Reinarz. cedents include an insolvency clause. 67-68 (1st ed. 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.S. Wright. This is a significant incentive.40.34 below. N. § 20A]. (4) the expenses incurred by the reinsurer in defense of claims may be reimbursable. 175. see Business Insurance Law and Practice Guide § 14. in whole or in part [see Robert W. (3) the reinsurer has the right to investigate and defend claims.08[3]. z Strategic Point — Cedents: Cedents should ensure that the insol- vency clause meets the requirements of the insurance department of their domiciliary state. et al. Law § 1308(a)(3).Y. these statutes have had the effect of ensuring that virtually all reinsurance agreements issued to U. I.

Munich Am. 1287-88 (W. is a disguished preference in favor of one creditor (the reinsurer) [Allendale Mut. Supp. Several courts have held that inclusion of a statutory insolvency clause in the reinsurance contract does not destroy the reinsurer’s right to set-off [Comm’r of Ins. who is deemed the “statutory successor” to the insolvent insurer [Martin Ins.E. Reinsurance Ass’n v. 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.281. v. Inc. the reinsurer would be forced to pay claims in full. Ltd.2d 1186. 1990) (applying Missouri law). 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. Agency. 823 P. Reinsurers should ensure that their insolvency clauses include this wording. In re Midland Insurance Co.2d 1365.. 590 N. Another court has determined that allowing a reinsurer to set-off unpaid premiums against sums owed the insolvent insurer under the reinsurance agreement would conflict with the priority of claims established by state statute and thus. 910 F.. z Strategic Point — Reinsurer: Many reinsurance contracts include an offset clause providing for net accounting between the parties [see § 40.08 Cal. t Warning: Reinsurers of insolvent companies must take care to pay claims to the appropriate party. Melahn.Understanding Reinsurance 40. 842 P.. Law § 7427].Y. 63-64 (Cal. 1992)]. Prudential Reinsurance Co.2(a)(2)]. Fla.Y. Ins.E. Ins.2d 48. 1192 (N.D. Stat. However. Superior Court. § 631. N. Balzano. in effect. 40-35 . v. at least one court has found that the insolvency clause’s directive that reinsurance be payable without “diminution due to the insolvency of the ceding insurer” abrogates the reinsurer’s right to offset unpaid premiums from sums due under the insurer’s policies [Bluewater Ins.35 for an example of a typical offset clause]. Reinsurance Co. Code § 922. 1991) (applying Missouri law)]. v. In addition. v.2d 249 (5th Cir. Prudential Reinsurance Co. 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). In the event of the cedent’s insolvency. Ins. 1992)]. Code § 1031. 706 N. 1283. Ins. Excess & Cas. Co. v.2d 694. Mo. 1992). 1999). 1371-74 (Colo. 773 F. In the absence of a right of offset.. Ins. 697 (Mass. a reinsurer may have a statutory or common law right of set-off (or offset) against amounts owed to an insolvent insurer’s estate for any amounts that the insolvent insurer owed to the reinsurer. Ann. they are generally obligated to pay the liquidator administering the insolvent company’s estate.

40-36 .N. 1977) (applying New York law)]. [see § 40. 1982) (applying California law).2d 491 (9th Cir. 656 F. Exception: A significant exception to the general rule that the reinsurer must pay an insolvent cedent’s liquidator occurs when the reinsurance contract contains a cut-through endorsement..08 New Appleman Insurance Practice Guide Comm’r of Cal.Y. Schneck. Reinsurance Corp. Skandia Am. Supp.05[2] above for a discussion of the operation of cut-throughs].D. 715 (S.40. v. 441 F.

4 Mealey’s Reins. Apprise the reinsurer of potential liabilities to enable it to set reserves.3d 1049. 2. 15. Rep. aff’d in part and rev’d in part. Some of the wording frequently used is as follows: • any event or development which. 1993).. Co. 762 F.IV. No. Notice provisions typically include information sufficient to: 1. The wording used to convey this requirement varies but usually conveys the need to give notice promptly. 40. Notice clauses also incorporate varying standards for the event or occurrence which triggers the requirement to give notice of a loss or claim.. the cedent should be mindful of the need of the reinsurer to provide notice in turn to its retrocessionaires. and Assist the reinsurer in determining whether and at what price to renew reinsurance coverage [Unigard Sec. v. Co. reh’g denied.09[1] Know What Notice Clause Requires. so that accounts between the parties can be settled. Enable the reinsurer to associate in the defense and control of underlying claims. Supp. Ins.09 Consider Insurer’s Notice Obligations. Consider: As a practical matter. River Ins. in the judgment of the 40-37 . Non-proportional contracts generally include wording requiring timely notice of individual claims. but instead obligate the ceding insurer to report losses paid and premiums received on a quarterly or monthly basis. Proportional contracts sometimes do not require individual notice of losses. at 7 (1993). CONSIDERING INSURER’S OBLIGATIONS TO REINSURERS IN CASE OF CLAIM. N. 4 F. 566 (S. 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.D. industry custom and practice are often reviewed to determine whether notice was timely. 40. 3. Ceding insurers should establish standards and procedures to ensure that notice is given to reinsurers in a timely fashion. immediately or as soon as reasonably possible or practicable. Notice requirements may differ with respect to proportional and non-proportional reinsurance. In many reinsurance disputes.Y.N. 1991)]. 1065 (2d Cir.

09[2] New Appleman Insurance Practice Guide reinsured. 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. . 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. Lathrop. Cross Reference: For a discussion of the notice requirement in reinsurance agreements covering environmental business. Many reinsurance contracts include wording permitting the reinsurer to associate in the defense of a claim. 40. see § 40. The claims cooperation wording can be included in the notice clause or as a separate provision [see § 40. might result in a claim .40.06[1]. 40-38 . § 10. .37 below for an example of a notice clause incorporating the right to associate with the ceding insurer in the defense of claims]. Some notice clauses require the cedent to inform the reinsurer of significant developments that arise after initial notice of a claim has been provided. 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. disaster. may result in a claim hereunder • any occurrence likely to give rise to a claim hereunder.36 below. in the opinion of the Company. Insurance Coverage for Environmental Claims.09[2] Reinsurer’s Assertion of Late Notice As Defense to Payment of Its Reinsurance Obligations. see § 40. see Mitchell L. Other notice clauses include specific or objective standards mandating notice. and • in the event of an accident.] 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 reinsurer’s performance). such as when the cedent’s reserve exceeds a certain percentage or when particular types of injuries occur. [For an example of a notice clause requiring notice of subsequent developments.11 below for a discussion of claims control and right to associate clauses.

Co.. In Pennsylvania. of Wausau. Ct. Co. 1993) (applying Pennsylvania law)]. 783 A. North River Ins. 335 F.Understanding Reinsurance 40..3d 300.09[2][b] Jurisdictions Recognizing Late Notice As Defense Regardless of Ability to Prove Prejudice. Co. z Strategic Point — Cedent: In some jurisdictions. without a showing of prejudice [Liberty Mut. 766 F. 93 F. 766 F.. App. Code § 554. at *4 (E. Co. Co. Co.2d 163.09[2][a] Jurisdictions Requiring Proof of Prejudice.. 141 F.. Co. Some courts have determined that breach of a notice provision is a complete bar to recovery.. In Connecticut. Ins. Co. Fortress Re Inc. 1985) (applying North Carolina law)]. of Omaha. Fed. the cedent has the burden of showing that the reinsurer suffered no prejudice [Travelers Ins. 1991) (applying California law)]. Central Nat’l Ins. i. 922 F. Ins. Exception: In some jurisdictions. a reinsurer may waive its defense of late notice if it fails to object promptly and specifically [Cal. of Omaha. 1999)]. In North Carolina. The particular nuances of late-notice law varies from state to state. Participating Plan v. Central Nat’l Ins. Co.2d 238. Safety Nat’l Cas.H. v. v. 207 (3d Cir. 1985) (applying North Carolina law). v. 1069-70 (2d Cir. 307 (7th Cir. Nat’l Am. 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. Supp. 2001)]. 1998) (applying Wisconsin law). Ins. v.D. Certain Underwriters at Lloyd’s London v. Gibbs. 1990) (applying Connecticut law)].2d 760. Co. v.2d 163. the reinsurer is required to prove prejudice only if the cedent first has demonstrated that its failure to give notice was in good faith [Fortress Re. 773 40-39 . 165-66 (4th Cir. v. the reinsurer must show that it was “unduly” prejudiced by untimely notice of loss [Life & Health Ins.W.3d 529. for example. of Cayman v. 528 (D.3d 1049. Co. Ins.2d 516.. Co.S. v. 4 F. Michigan Twp. Conn. 240 (N. 733 F. Zenith Ins. 2003) (interpreting New Jersey law).09[2][b] 40. Co. Certain Underwriters at Lloyd’s London. 1993 U. was grossly negligent or reckless in failing to provide notice [Unigard Sec. Co. Co.. Inc. 40.e. of Pa. Ins. Co. 538 (9th Cir. 292 N.3d 205. 522. 1993) (applying New York law). of Am. Fed. late notice may entitle the reinsurer to relief without a showing of prejudice if the cedent acted in bad faith. Home Ins. Pa. Co. & Great Nat’l Ins. 767 (Mich. v. 165-67 (4th Cir. Employers Ins. 523-24 (9th Cir. Central Nat’l Ins. v. LEXIS 12165. 1996). Associated Int’l Ins. Ins. Ins. Dist.

875 (N.10 Consider Reinsurer’s Right to Access Insurer’s Records. or when 40-40 . Employers Reinsurance Corp. see Eric Mills Holmes. Reinsurers may choose to inspect cedents’ records on a regular basis. v. v. 2d 865. 379 N. Appleman on Insurance 2d § 105.” The right to audit or inspect is important to the reinsurer. 18-19 (1st Cir.. Requests for inspections or audits also may arise in the following circumstances: in preparation for the annual renewal of a reinsurance contract. 40. Employers’ Surplus Lines Ins. Supp.” “Inspection of Records” or simply “Audit. The inspection clause allows the reinsurer to evaluate the performance of the reinsurance contract. 171-73 (E. Ill.E. Exception: The Ninth Circuit has stated that. App. when the cedent has not provided sufficient information in presenting losses. These cases thus construe the notice provision as a condition precedent to performance. as the nature of reinsurance dictates that the cedent maintain all of the information about the business written and the claims made. how it is handling claims and whether they are covered by the reinsurance agreement. 1978) (applying Illinois law).7. of Ill. Highlands Ins. 93 F. Some inspection clauses provide access to claims files only.2d 34. 1985) (applying Massachusetts law). specifically. citing INA Ins. City of Chi. Co.D. Co.D. v. Co. Ct.2d 15. Cross Reference: For a discussion of reinsurance cases considering late notice defenses and what constitutes prejudice to a reinsurer from late notice. 441 F. This clause might be called “Access to Records. even where notice is denominated a condition precedent. what business the reinsured is underwriting. v. 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. when there is a change in the loss reporting pattern. 40. 2005). 1996) (applying California law)]..10[1] Consider What Access to Records Clause Requires to Be Made Available to Reinsurer. the reinsurer still must demonstrate prejudice to be relieved of liability [Nat’l Am. Ins.3d 529. Most reinsurance contracts include a provision granting the reinsurer the right to inspect or audit the ceding insurer’s books and records. 169. 36 (Ill. Supp. Certain Underwriters at Lloyd’s London. 497 F. Allstate Ins. Co. 1980) (applying Texas law)].. 539 (9th Cir.40.10[1] New Appleman Insurance Practice Guide F. Co. La. when there is a marked change in premium volume.

. 4. 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. underwriting guidelines. A frequent inspection-related issue is the impasse that occurs when a . Documentation regarding brokers. Use of consultants to assist in audits has become increasingly common as the magnitude and complexity of claims. 5. 40-41 2. Selected underlying claims files. 4.Understanding Reinsurance 40. 3. Documents typically requested by reinsurers during claims inspections include the following: 1. 3. limits of liability. and Inspection reports on claims handling facilities. The right of inspection is as broad or narrow as the particular contract wording provides. Basic underwriting information for the direct insurance. Access usually is permitted at all reasonable times and is typically provided where the records are normally kept. Claims bordereaux (i. summaries). Premium information.e. Access often is provided to the reinsurer and its authorized representatives. Documents typically sought during underwriting and financial audits or inspections include the following: 1. Reinsurers also often seek audits or inspection when cedents enter run-off or exit certain business sectors. 2. A typical inspection or audit clause defines broadly the records to which the reinsurer is entitled. The claims register. insured’s location. have caused reinsurers to engage independent auditors or consultants to perform records inspections. including the name of the insured. broker. name of underwriter and underwriting analysis.10[1] there is another unusual event regarding either the claims or underwriting/premium activity. type of coverage and policy provisions. policy number and period. Reinsurance contract wording. allowing the use of consultants to conduct inspections. evaluation of risks. and Accounting files showing cessions of premiums and losses. third-party administrators and delegations of underwriting authority. especially in long-tail casualty lines. negotiation files.

The inspection right vests in the reinsurer or in any of its authorized representatives. Dist. as a result. a court ordered a reinsurer to make its payments current. The right of inspection survives contract termination. In one case. each party claims the other has breached the contract and thus the obligation to perform is suspended until the prior breach is remedied. at *11 (S. The reinsurer has the right to inspect all books and documents relating to business ceded to the reinsurer under the reinsurance agreement. This decision may be limited by the specific facts of this reinsurance relationship. Home Assurance Co. Appleman on Insurance 2d § 106. 1991)]. v. 4. see Eric Mills Holmes. the cedent is obligated to furnish information reasonably requested 40-42 .4[A].Y.39 below.40. Exception: A federal court affirmed an arbitration panel’s finding that. 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.S. LEXIS 501. Cross Reference: For an example of a typical access to records clause in a reinsurance agreement. Arbitration panels usually elide this dilemma by ordering an inspection or audit as a part of discovery. 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. The cedent may then refuse to allow the audit until the claims are paid. Instituto Nacional de Reaseguros. 2. despite the reinsurer’s complaint that the cedent had refused it access to records regarding one of the treaties at issue.N.10[1] New Appleman Insurance Practice Guide reinsurer’s claim payments are delinquent and it has demanded an audit to verify the claims’ validity. even in the absence of an audit or inspection clause. The court found the cedent’s insistence that payment be current before access to records was permitted to be “commercially reasonable” given the reinsurer’s failure to object to the cedent’s statement of account or pay them. 3.D. The clause should include the following provisions: 1. Cross Reference: For additional examples of inspection clauses. and Access for inspection will be allowed at all reasonable times. 1991 U. see § 40.

N.S. The court granted the cedent’s petition to compel arbitration despite its refusal to allow the reinsurer access to its records [Phila..10[1] by the reinsurer. 1994)]. 44 F. at least one court has held that allowing the reinsurer to inspect is not a condition precedent to the right to arbitrate.G.4 (1994)]. Mut. Universale Ruckversicherungs A. Corp. Wright. Dist. Consider: While reinsurers can enforce the right to inspection through arbitration or. One court found a reinsurer’s fraudulent concealment claim “untenable” in the light of the reinsurance contract’s inclusion of a typical access to records clause. 1981 U. Aug. at *1 (S.S. 832 (9th Cir. Co. 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. Co. Dist. Cross Reference: The inspection and audit provision is often included within the claims cooperation clause of the reinsurance contract. Safety Mut. For a discussion of claims cooperation or control (and 40-43 . Ins.D. cedents should develop a policy regarding the privileged information they will or will not disclose to their reinsurers. t Warning: A reinsurer’s failure to exercise the right of inspection may have a negative impact in a later dispute with its cedent. v. The panel had denied recovery to the cedent after it failed to support its reinsurance claim with sufficient information [Mich. 1981)]. LEXIS 13864. Ins.3d 826. v. LEXIS 56..D.10[2] below discussing the cedent’s dilemma in providing privileged documents to its reinsurer]. Hammesfahr & Scott W.Understanding Reinsurance 40.. 1994 U.Y. 1995)]. if the contract does not include an arbitration clause. Unigard Sec. Reinsurance Corp. at * 7 (S.N. v. Cas. Some courts have found that coverage opinions prepared by cedent’s 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 conflict between the cedent and the reinsurer) [see § 40.Y. The Law of Reinsurance Claims 6. Jan. 5. 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. through a lawsuit. 7. z Strategic Point — Cedent: To the extent possible.

10[2][a] Common Interest Doctrine. arbitrators may order the parties to treat the entire arbitration process. 40. 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. For example. Cross Reference: See § 40. Thus. considered in the light of the nature of the relationship between the parties and the circumstances that exist at the time of disclosure. see § 40. Cross Reference: For an example of a clause requiring confidentiality that can be added to or used in conjunction with an access to records provision.10[2][f] below for a discussion of the use of confidentiality agreements to protect a cedent’s privileged documents.10[2][a] New Appleman Insurance Practice Guide right to associate) clauses in reinsurance contracts.10[2] Consider Whether Insurer’s Disclosure of Privileged Documents to Its Reinsurer Constitutes Waiver As to Third Parties. While there do not appear to be any published decisions on this issue. depending on the nature of the cedent/ reinsurer relationship. it is likely that courts or arbitration panels would permit cedents to condition inspections in this manner.40 below. 40. A reinsurer that objects to executing a reasonable confidentiality agreement pertaining to the inspection of records may risk alienating the adjudicators. Including Its Insureds. not just the outcome. (The question of nonwaiver of privilege is separate from the question whether the cedent is required to share privileged communications with the reinsurer. 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). as confidential. see § 40. Arbitrators have demonstrated a general trend towards imposing confidentiality on the parties beyond that strictly provided in the reinsurance contract.40. There is no cedent-reinsurer privilege.11 below. specifically. whether the cedent and reinsurer had a “common interest” when the disclosure was made. Consider: Cedents often ask reinsurers to sign confidentiality agreements before permitting access to records.) 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 .

Y. The doctrine is not applicable. 52 F. 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.R. (ii) any common interest was commercial and not legal. courts often reject assertion of the common interest doctrine and find a waiver of privilege when the cedent has disclosed the materials to its reinsurer. 366 (D. v.3d 1194 (3d Cir.10[2][b] counsel waives any privilege that otherwise would apply to the communication. Phila. & Sur.. Aetna Cas. 233. although not privileged inter sese [N. 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. v. Certain Underwriters at Lloyd’s London. Ill. Co. Supp. 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. aff’d in part and rev’d in part on other grounds. Ct. CIGNA Reinsurance Co. Ins. Edgemark Fin. when the parties’ shared interests are only commercial [Blanchard v. 40-45 .D. Reinsurance Corp. the common interest doctrine did not apply because: (i) there was no evidence that the documents were disclosed in anticipation of litigation. 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. v. Corp.Y. 237 (N.. 1992). River Ins. Co. 797 F. Co..D. and (iii) the disclosures were made in the ordinary course of business [Allendale Mut. 1998)]. 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. 40. 1995)]. Communications made to the shared attorney to establish a litigation strategy are privileged as against all others. 2000). Sup.” enabling parties with a common interest to share privileged information without waiving privilege against a third party.N. 676 N. however. The common interest doctrine is most commonly recognized when multiple parties are represented by the same attorney.S.Understanding Reinsurance 40. 192 F.10[2][b] Disclosure Made Prior To Insurance Coverage Litigation.2d 727. 363. 731-34 (N. N. River Ins.J. It is most often used as a “shield.

D.R. at *15 (D.Y. LEXIS 16423. 152 F. MGM Grand Hotel — Las Vegas. v.10[2][b] New Appleman Insurance Practice Guide Co. 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.Y.S. Dist. Co.. Dist. Inc.. v. & Sur. Ins. Sup. Co. Cal.Y. Co. June 9. 141 (N. Prot. 1993)]. v. the reinsurer’s requests for privileged information from a cedent should be made carefully. 731-34 (N. 1983)]. 538-39 (E. a cedent that discloses privileged communications to a reinsurer risks a later finding that it has waived its privileges.D. 676 N. Example: Even where a reinsurer had anticipated that coverage litigation would arise from a large policyholder claim.. 1998)]. 132. Ct. regardless of whether the reinsurer believes it is entitled to the information or whether the cedent has customarily provided it. where the parties were not in litigation and the reinsurers’ common interests were purely commercial [Aetna Cas. Thus. 533. especially that which reveals the strategies and thought processes of the cedent and its counsel in evaluating and litigating a policyholder’s claim. Bull Data Sys. Exception: A court refused to find waiver of privilege based on the reinsurer’s need to review the cedent’s documents to determine the extent of its reinsurance exposure [Great Am.D. 1996 U.N. Ace Oil Co. LEXIS 17503. 120 F. Example: In a case involving a cedent’s demand for discovery from a group of reinsurers. Surplus Lines Ins.S.R.2d 727. 1996)]. Co. Cont’l Cas. v. 1983 U. z Strategic Point — Reinsurer: It is in both the cedent’s and the reinsurer’s best interests to minimize the risk that a policyholder might gain access to privileged information. Ill.40. a court refused to find a common legal interest among the reinsurers sufficient to avoid waiver of attorney-client privilege. 1988)]. Nev. at *2 (S. Certain Underwriters at Lloyd’s London. 40-46 .. Example: A cedent’s 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. z Strategic Point — Cedent: Given the inconsistent views of courts considering the applicability of the common interest doctrine.D.D.S.

Understanding Reinsurance 40. restricts further disclosure of the material and endeavors to preserve all applicable privileges or immunities against disclosure [see § 40. Consider whether disclosure of privileged information to the reinsurer is really necessary. An order finding common interest might bolster the assertion of privilege against a claim of waiver in a subsequent dispute between the cedent and a policyholder. z Strategic Point: Cedents and reinsurers invoking the com- 40-47 . 4. enter into a confidentiality or common interest agreement that acknowledges a common interest between the cedent and reinsurer. If litigation or arbitration between the cedent and the reinsurer is already in progress. the facts necessary for a reinsurer to evaluate a settlement can be provided through means other than the disclosure of privileged materials. 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. 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): 1.10[2][f] for a discussion of the use and efficacy of confidentiality and common interest agreements]. Cross Reference: For a discussion of cases considering the availability of protection for privileged or confidential information provided by a cedent to its reinsurer.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. For example. Insurance Coverage for Environmental Claims § 10. 2. 3. 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. see Mitchell L Lathrop.06[4][c]. If disclosure must occur.

LEXIS 21563.S. Fire Insurance Co. The fact that the reinsurer is not a party defendant is of little significance. 533. Dist. at *6 (M. v. where the cedent had disclosed a memorandum to its reinsurer [U. The doctrine was similarly applied to preclude waiver of privilege as against an excess insurer overlying the cedent.D. Reinsurance Corp. Co. Ill. Employers Ins. v. 363. LEXIS 8280. Ass’n Trust v.D. 183 F.S.D. 632 (N. Dist. LEXIS 10943. Some courts have emphasized the cedent’s 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.D.. 1989 U. Ill. 797 F. 1999). U.S. 1989). This can be an advantage or a disadvantage in a subsequent dispute over reinsurance payment. v. but see U. 1991 U. Trust v. v.D.Y. Co.Y.. 183 F. 366 (D. July 19..R. In most circumstances. of Wausau.. Gen. 1989 U. 1999). Fla. at *4-7 (S. 631 (N. 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. where the insurer had disclosed privileged material to another reinsurer [Employer Reinsurance Corp. 1988)]. LEXIS 8280. Pepper’s Steel & Alloys.S. v.R.S. Reinsurance Corp.R. 120 F. Dist. at *6-7 (S.D.N. River Ins. Reinsurance Corp. 1992)]. Gen.N. 627. 2006)]. Great Am. 1989)] and as against a reinsurer. depending on the content of the privileged material. Employers Ins. Dist.D.N.S. U. Laurier Indem. Fla.Y. Co. 1989). 1991)]. Sch. v. Gen.D.J. Ass’n Ins. Inc.10[2][c] New Appleman Insurance Practice Guide 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.. the involvement of a broker as a conduit for disclosure of privileged information does not by itself effect a waiver [see Minn. Ace Oil Co. Co. The majority of courts that have addressed the issue have determined that a cedent’s 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. Supp. Bds.D.. 40. Co. at *8-10 (S. of Wausau. v.S. Dist. Exception: A court found that there was no “unity of interest” protecting from disclosure correspondence between an insurer 40-48 . Sch.. Fire Ins. 537-38 (E.40. Surplus Lines Ins. Cal. LEXIS 8280. Co. Co.D. at *6-8 (S. 1989 U. Fire Ins. Reinsurance Corp.D. 2006 U. Phila.S. 627.S.N. Bds.10[2][c] Disclosure Made During Course of Insurance Coverage Litigation.

Am. and litigation ensued. Columbia Cas. When a cedent wishes to disclose privileged information to its reinsurer after settlement or adjudication of an underlying coverage action. Dist.Understanding Reinsurance 40.S. Co. at *12 (S. At least one court has declared that a cedent’s 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. 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). the insurer failed to establish that it coordinated legal strategy with its reinsurer [Reliance Ins.D. v. LEXIS 7140. 1995)]. their interests . . 1995 U. it is unclear whether the common interest doctrine will apply.. at *22-23 (S. and the common interest doctrine therefore does not apply” [North River Ins.N. In the process of seeking payment from CIGNA under their reinsurance contract.10[2][e] Disclosure Made During Course of Reinsurance Litigation. 2001 U. River Ins.S. It was not. 90 Civ. the court rejected the common interest argument. Co. North River provided the [privileged memos]. No. Dist. finding that “[t]he interests of the ceding insurer and the reinsurer may be antagonistic in some respects and compatible in others. Dist. it may not have the ability to assert the common interest doctrine to protect against the assertion that the privilege has been waived. . 40.N.S. When a cedent voluntarily discloses privileged communications to a reinsurer during the course of a dispute involving a claim for reinsurance.10[2][d] Disclosure Made After Resolution of Insurance Coverage Litigation But Prior to Institution of Arbitration or Litigation Between Cedent And Reinsurer. As the court explained: North River and CIGNA had no common legal interest.Y.D. Co. LEXIS 53. Co. Lintex Corp. A case where a reinsurer attempted to compel production of its cedent’s privileged documents by arguing that the parties had a common interest sheds some light on the issue.Y.10[2][e] and reinsurer regarding an insured’s claim that had ripened into litigation. a common interest cannot be assumed merely on the basis of the status of the parties” [N. at *10-11 (S. Jan.N. Thus. In that case. were antagonistic. 5.. LEXIS 53. Co. On the contrary. apparently hoping that CIGNA would be persuaded to pay. 1995 U. 40. v. 1995)].Y.D. Columbia Cas.. 2518 (MLJ). At no point did North River and CIGNA engage in a common legal enterprise. The court added: “[w]hile their commercial interests coin40-49 . v. 2001)]. Although their commercial interests coincided to some extent.

Thus. 40.10[2][b] above discussing application of the common interest doctrine to the reinsurance relationship]. their legal interests sometimes diverge. In short [the reinsurer’s] only argument for finding a common interest is that the two parties stand in the relation of reinsurer to ceding insurer. at 15]. Put differently. and that is insufficient” [id. 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. 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. to indicate the factual circumstances and understandings that exist at the time of disclosure. more precisely. A demonstration through an agreement that the cedent and reinsurer mutually intended to respect and maintain the confidentiality 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. unless it can demonstrate a common interest between the cedent and reinsurer that avoids the waiver [see § 40. This may better the parties’ position if a waiver claim is later asserted. however. it confirms the underlying circumstances at the time of disclosure so as to confirm the lack of any intention to effect a waiver as against third parties. A cedent that discloses privileged materials to its reinsurer risks waiving the privilege as against its policyholders. Examples — Waiver: A court allowing disclosure despite the existence of a confidentiality agreement reasoned that: “[t]he agreement does not alter the objective fact that the confidenti40-50 . A confidentiality agreement may not. rather. and the outcome of a waiver dispute may depend on the reinsurer/cedent relationship at the time of disclosure. as demonstrated by the instant litigation.40. provide full protection against a claim for disclosure.10[2][f] New Appleman Insurance Practice Guide cided to some extent. a confidentiality or common interest agreement does not create a privilege. Courts have inconsistently recognized a common interest between cedents and reinsurers. Cedents and reinsurers that wish to avoid a waiver of privilege can execute confidentiality or common interest agreements to try to preserve applicable privileges or immunities against disclosure or.10[2][f] Use of Confidentiality and Common Interest Agreements.

Nat’l Bank of Wash. Dist.S. .S. v. Inc. 2001)]. Oct. . 197 F. which could apply to many of the disclosed documents. A court considering the confidential exchange of legal advice and information pursuant to a cross-consultation agreement among insurance companies and Lloyd’s 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 confidential [Travelers Cas.D. Plaintiff has no genuine claim of confidentiality to the documents it produced .D. . .” disclosure pursuant to a confidentiality agreement militated against a finding of waiver of work product protection [SmithKline Beecham Corp.. v. LEXIS 21969. Ohio 2000)]. 607 (S. While courts have often taken a stricter view of the attorney-client privilege and have been quick to find a waiver where the confidentiality that the privilege protects has been breached. courts applying the work product immunity generally have been more tolerant of disclosure to third parties.. Sup.Y.. 67-68 (D.D.10[2][f] ality has been breached voluntarily . 2004 U. 601. Co..C. Another court. at *15-16 (N.” [Chubb Integrated Sys. & Sur.. 1984)]. v. Co.R. Examples — No waiver: One court found that disclosure to a party pursuant to a confidentiality agreement did not substantially increase the opportunity for an adversary to obtain the document and therefore did not constitute waiver of work product protection. Ltd. The work product immunity will not be deemed waived “unless the disclosure is inconsistent 40-51 .S. Dist.R. although the court did not determine whether the common interest doctrine actually applied [BASF Aktiengesellschaft v. 52. 2001 U. Excess Ins. Pentech Pharm.D. LEXIS 18281. The agreement is merely a contract between two parties to refrain from raising the issue of waiver or from otherwise utilizing the information disclosed.. 1998)]. Reilly Indus. refusing to find a common interest precluding waiver. 733 (N. explained that: “[a] private agreement by the parties to protect communications cannot create a privilege” [Aetna Cas. Ltd.D. 676 N. 2004)]. v. “while not dispositive. . Co. Certain Underwriters at Lloyd’s London. Ill. Ind. & Sur.Understanding Reinsurance 40. 103 F. Another court similarly found that.2d 727. z Strategic Point — Cedent: A confidentiality or common inter- est agreement may be particularly helpful in maintaining protection under the work product doctrine.Y. 19. Ct.D. at *13 (S.

Several types of documents in a ceding insurer’s files could be subject to privilege or immunity as against the reinsurer. v.N.e. Nevertheless.10[3][a] New Appleman Insurance Practice Guide with maintaining secrecy from possible adversaries” [U. 1989 U. 40. Expert reports or analyses of a claim by the insurer’s or insured’s personnel concerning the defense of a claim. the courts that have addressed the interplay between the contractual obligation to permit inspection 40-52 . In some circumstances. Gen.10[3] Consider Reinsurer’s Ability to Compel Production of Cedent’s Privileged Documents. aff’d on subsequent appeal. 1989) (citation omitted). Insurance Coverage for Environmental Claims § 25. including: 1.S. In some circumstances.D. of Am. Cal. 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. Reinsurance Corp. 1996)]. 2. Co. Lathrop.S. reinsurers may have a legitimate interest in reviewing such documents. 167 F. v.04]. and Draft pleadings and communications with counsel regarding those pleadings.R. However. Coverage analyses by the cedent’s in-house or outside counsel.40.D. July 20. a ceding insurer may wish to withhold privileged documents from a reinsurer. Fire Ins. 447. Shields. 454 (S. a policyholder) would gain access to the disputed documents. at *7 (S.D. 92 F. Mitchell L. LEXIS 8280. Dist. 1995).. 3. 40. perhaps to avoid a potential waiver of privilege which would obligate the cedent to provide the documents to its insured. a cedent should be able to argue that disclosure of work product material to a reinsurer under the auspices of a confidentiality agreement has not increased the likelihood that a current or potential opponent in litigation (i.Y. Claims counsel reports regarding the defense of policyholders. 4..3d 1503 (9th Cir.10[3][a] Consider Whether Inclusion of Access to Records Clause Constitutes Waiver. A frequently raised issue is the extent to which access-to-records clauses allow reinsurers to compel production of documents contained in the cedent’s files that are subject to attorney-client privilege or work product protection.

River Ins. 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.S. River Ins..3d 1194 (3d Cir.. 1995 U. 369 (D. 788 N. Columbia Cas.D. Vol. aff’d in part and rev’d in part on other grounds. LEXIS 53. at 369]. courts have determined that the “in issue” exception has not applied. Co. Sup. 4.Y. 40-53 . v. 797 F. 4 at F-2]..N. Transatlantic Reinsurance Co. Co. Reinsurance Corp. v. v.2d 44. 1995). Phila.S. Supp. Co.. Co. Gulf Ins. where the courts find that the party intending to rely on privileged materials to prove its claim or defense implicitly waives the privilege. No. Phila.. App.Y. [N.10[3][b] Know When Privileged Documents Are “In Issue” Therefore Requiring Production by Cedent. 45-46 (N. Another court reasoned that the access to records and cooperation clauses do not waive privilege because the cedent’s obligations under these provisions end when the cedent and reinsurer become adversaries [U.Y. 1995)].J. Co. 1995 U.Y. Co. the “in issue” exception is an application of waiver principles. 2004)]. River Ins. Div. No. Columbia Cas. Often. 1995). 363.Y. 52 F.S.. River Ins. 1992). Ct. 1992). Aug. LEXIS 53.D.S. v. N. reported in Mealey’s Litigation Reports: Reinsurance. 797 F. 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. N. Dist.) In the majority of the reported decisions considering the “in issue” exception in the context of a reinsurance dispute. v. Co. River Ins. v. 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. Supp. Phoenix Assurance Co. v. Phila. v. 40. Reinsurance Corp. at *17 (S. Fire Ins. (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. absent more explicit language.N.N. 7. Co. Co. River Ins. it does not through a cooperation [or inspection] clause give up wholesale its right to preserve the confidentiality of any consultation it may have with its attorney concerning the underlying claim and its coverage determination” [N. Co. CIGNA Reinsurance Co.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 cedent’s privilege as against the reinsurer [N. Dist. at *16-17 (S. 7712/91 (N..Understanding Reinsurance 40.

by seeking coverage. Phoenix Assurance Co. Div. First State Ins. a court found that. 2007). River Ins. 4. May 29. the court ruled that a cedent waived attorney-client privilege when its reinsurance director responsible for preparing the bill to the reinsurers testified 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 insured’s claim was based on California’s “all sums” and “non-accumulation” rules. U. Supp. 430 F. LEXIS 53. that in a recent decision a court did find a limited waiver based on the “in issue” doctrine. 2005)].Y. Reinsurance Corp. Several courts have reasoned that merely placing the broad question of coverage in issue is insufficient to constitute a waiver of the privilege [N. Co. 4 at F-2]. [No. Co. Phila. Vol. 1992). 7712/91 (N. however.. v. App. Co. Co. 1995 U. 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.S. & Guar. 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...S. It should be noted. River Ins.40. Aug. Dist. No. reported in Mealey’s Litigation Reports: Reinsurance. 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. 18. Sup. Sup. Columbia Cas. No. the insured put “in issue” its knowledge regarding its potential liability to the claimant and regarding its notice 40-54 . at 370-71. 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. N. In American Re-Insurance Co.. Supp. United States Fid. at *17. v. Ct. No. Fire Ins. 1st Dept. v. 604517/02 (N. Co. The reinsurer’s motion to vacate the panel’s order was denied [Nat’l Cas. Group. reported in Mealey’s Litigation Reports: Reinsurance. Co. Exception — Notice Condition Precedent to Coverage: In a direct insurance coverage dispute where timely notice was a condition precedent to coverage.. 3 at B-1]. 7. 797 F.10[3][b] New Appleman Insurance Practice Guide Reinsurance Corp. 797 F. v.Y.3d 492.. v. at 370-71]. 494-97 (1st Cir. Vol.

. Columbia Cas. the court ordered disclosure of allegedly privileged documents to a policyholder based on the cedent’s disclosure to a reinsurer. Co.Understanding Reinsurance 40. 2006)]. It is unclear whether courts will find that a common interest exists if the parties are not involved in a legal dispute. 2006 U. when there was no indication as to whether the reinsurer/cedent relationship was adversarial at the time of disclosure [McLean v.N. v. 1992) aff’d in part and rev’d in part on other grounds. River Ins. In contrast. the cedents and reinsurers were found to be united in interest due to the cedent’s involvement in coverage litigation at the time of disclosure. In addition. Reinsurance Corp.S. River Ins.10[2][c] above]. CIGNA 40-55 . Co. Supp. Co. LEXIS 53. 367 (D.D.10[3][c] Consider Application of Common Interest Doctrine to Compel Production of Cedent’s Privileged Documents. v. LEXIS 17503.S. Dist. 40. Co. Re- insurers have tried to use the common interest doctrine as a “sword” — to gain access to a privileged materials over its cedent’s objection. 40.D. River Ins. The absence of an adversarial relationship between cedent and reinsurer may not guarantee a common interest forcing disclosure. At least one court has advised that a cedent’s 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.Y.10[3][c][i] Prior to Dispute Between Cedent and Reinsurer. Co. even at the pre-dispute stage.N. at *15 (S.J. one court has gone so far as to reject the theory that a common interest ever exists between cedent and reinsurer. The court emphasized that the insured had the burden to prove that notice was timely. however.S. 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. N.N. 363. 1995)]. 797 F. 1996)]. Dist.10[3][c] obligations. In many of the cases finding common interest protection as against the policyholder [see § 40. Co. v. LEXIS 56733.Y. Phila.10[3][c][ii] below].Y. at *5-10 (S. Dist. In another case.N. 1995 U. in the few reported cases rejecting common interest claims by reinsurers.. Diamond State Ins. 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. 1996 U.. Cont’l Cas. the interests between cedents and reinsurers were already adverse [see § 40. Inc. v.D.. at *2 (S.

CIGNA Reinsurance Co. LEXIS 53. Dist. v. Aug.Y.10[4] Understand When Insured Is Entitled to Discover Its Insurer’s Reinsurance Information. Vol.Y. N. v. reported in Mealey’s Litigation Reports: Reinsurance. In some instances. however. Reinsurers are more likely to obtain a cedent’s privileged documents regarding the underlying claim in arbitrations. 1995). Policyholders often seek access to correspon- dence. Vol. Reinsurance Corp. Fire Ins. Phoenix Assurance Co. 40. if the Panel orders disclosure in a confidential proceeding over the cedent’s objection.3d 1194 (3d Cir. 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. where arbitrators can more easily impose confidentiality restrictions and are not bound to follow strict rules of law or evidence.3d 1194 (3d Cir. Sup.40. 1992). Co. 7.D. Co. River Ins. No. Co. In general. 7. Phoenix Assurance Co. 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. v.10[3][c][ii] During Reinsurance Dispute Between Cedent and Reinsurer. Co. 7712/91 (N. Sup... Aug. In the courts. 4 at F-1]. 4 No.S.N..J. 40. 52 F.. Columbia Cas. U. N.. 4 at F-2].10[4] New Appleman Insurance Practice Guide Reinsurance Co. Co. 797 F. River Ins. reinsurers seeking privileged documents under the common interest doctrine have been unsuccessful when the parties are already embroiled in a reinsurance dispute [N. Ct.S. Supp. at *5-15 (S. In all likelihood. 363. 52 F. 1995).N. 40-56 . 7712/91 (N.Y. v. 1992). Reinsurers may be less likely to obtain a cedent’s privileged documents during reinsurance litigation because the reinsurer’s alleged breach of the reinsurance agreement suspends the cedent’s disclosure obligations pursuant to the inspection clause [U. Phila. 1995)].. Co. 4 No.S. River Ins. Ct. that should not waive privilege vis-a-vis others. reports. 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 confidential and proprietary. 366-68 (D. 1995 U. v. Fire Ins. policyholders hope to strengthen coverage claims by finding admissions or inconsistencies in these materials. reported in Mealey’s Litigation Reports: Reinsurance. No. 1992) aff’d in part and rev’d in part on other grounds.

R. 1995). 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. Home Indem. 83-84 (N. 1234 (Pa. 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. v.. at *30-32 (C.S. Paul Surplus Lines Ins. 2005). 78. 2005 U. Dist. No. at * 13 (E. Paul Surplus Lines Ins.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. Pa. Peco Energy Co.D. v. Arrow Int’l. LEXIS 22157. LEXIS 39691.. Dist. Co. 16. 04-1490 (D. Medmarc Cas. Co. Rhone-Poulenc Rorer. of N. Corp. 1991)].D. 612 (E.D. Co.. Ins.R. reported in Mealey’s Litigation Reports: Insurance. 2006). Co.2d 1230. R. Ill. 2004)]. 852 A. Pac.S. In some instances. .D. Super..Understanding Reinsurance 40. Keating Bldg. Nat’l Union Fire Ins. Dist.S. such as misrepresentation/ 40-57 . Pa.. 2006 U. v. Ill. . at 7. St.. v. LEXIS 15082. Dec.N. Aetna Cas. Reinsurance communications have been found relevant and discoverable typically when there is a defense raised by the ceding insurer in a direct coverage dispute. 2005). Co. 1987)]. have yielded mixed results. Ins. which states that “a party shall.D. Co. 2002 U. Medmarc Cas. without awaiting a discovery request.S. Am. provide to other parties . 116 F. Dist. at *6-7 (N. v. v. Ill. Inc..D. v. Co. Inc. Co.D. 2005 U. Corp. Country Life Ins. of Pittsburgh.. St. Cont’l Ill. Co. Co. 2002). . Inc. Arrow Int’l. Mo. Dist. or have simply noted the existence of a confidentiality agreement precluding wider dissemination of the material [Ohio Mgmt. 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. at * 9 (E.. LEXIS 15082. & Sur. Pa. La.S. LLC v. Ins. Dist. 2006). 21. v. v.. 1995 U. Ins. at *28-29 (C. LEXIS 39691. Tex.D. 609. Co. including reports and other correspondence between cedents and reinsurers. Many of these decisions are premised on the disclosure mandated by Rule 26(a)(1)(D) of the Federal Rules of Civil Procedure.R. Co.D. 139 F. James River Ins. For example. 2002).. LEXIS 47516.D.J. 2002 U. Co. courts have acknowledged that reinsurance agreements contain proprietary or confidential information and ordered production of the contracts pursuant to a protective order. Ceding insurers’ attempts to block access to other types of reinsurance information. 29. Vol. Pa. No.S. at *6 (E. Ct.

D. which puts the reinsurance information at issue. at *6-7 (E. 2006)]. 2006 U.D. The court reasoned that pre-policy-issuance communications with reinsurers could reveal what financial information the insurers relied upon when deciding to issue the policies [Nat’l Union Fire Ins. Co. Cont’l Ill. 2004)]. Dist. Inc.D. Example — Reinsurance Communications Relevant: Notes and memoranda prepared by reinsurers’ claim representatives concerning information relayed by the cedent’s claims personnel concerning a policyholder’s claim were relevant to a direct coverage dispute. Co. v. 152 F. of Pittsburgh.S. LEXIS 68387. of N. v.. communications between an insurer and its reinsurer were relevant to an insurer’s claim for rescission based on the policyholder’s alleged misrepresentation concerning his health [Sotelo v. 852 A.D. 78.D. Ill. Cal. Pa. 1991). Example — Reinsurance Communications Relevant: Insurers’ com- munications with reinsurers were found relevant to a claim for rescission of the policies based on the policyholder’s alleged misrepresentations as to its financial condition. Peco Energy Co. 132.D. Home Indem. Super. 139 (N. at * 8 (N.R.. 82 (N. Dist. LEXIS 16336. 1233-34 (Pa. Bull Data Sys.. Ins. Old Republic Life Ins. Similarly.10[4] New Appleman Insurance Practice Guide nondisclosure or lack of late notice. v. Co. The court reasoned that the materials were likely to elucidate conflicts between the cedent and its reinsurers which might explain why the ceding insurer had refused to pay the claim [Allendale Mut.R.. Ct. 1987)]. 116 F. Example — Reinsurance Communications Relevant: Reinsurance information was directly relevant to rebutting the insurer’s 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.40. Ill. post-issuance communications with reinsurers were relevant to the insurers’ allegation that the policyholder breached its duty to cooperate with insurers [id. Example — Reinsurance Communications Irrelevant: A federal dis- trict court for the District of Columbia ordering discovery of the existence and contents of the ceding insurer’s reinsurance agree40-58 . Co.S. Pa.. v. Corp.2d 1230. Am. at 82-83]. or to reconstruct a lost policy or provide extrinsic evidence of an ambiguous policy provision. Ins. In addition.. 1991 U. 1993)].

t Warning: If a cedent summarizes advice given by coverage counsel in correspondence with its reinsurer. Claims control clauses are not typical. River Ins. Related to the right to inspect the cedent’s records is the reinsurer’s right to associate in. Lathrop.. 23. of Reading Pa. 4 F. 1993)]. the defense of claims.Y.D. Supp. aff’d in part. 136 F.11 ments denied discovery of other reinsurance communications on relevance grounds. Co.C. v. No. v. Ins. reported in Mealey’s Litigation Reports: Reinsurance. N. Under a right to associate (sometimes called a “claims cooperation”) clause. v.D. Co.3d 1049. Co. Gen. River Ins. 40. 1993)]. Mitchell L. sometimes termed “counsel and concurrence” or “concur and consent” clauses. Co.]. 1055 (2d Cir. 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.11 Consider Reinsurer’s Rights Under Right to Associate Clause or Claims Control Clause. Ins. C 92-5192B (W. A right to associate clause typically gives the reinsurer the right to participate “in the defense and control of any claim. Union Ins. Appleman on Insurance 2d § 107. 1990)]. v. They go further than right to associate clauses in giving the reinsurer control over claims settlements. rev’d in part. there is no right to associate if there is no direct impact on the reinsurance coverage [id.N. 1055 (2d Cir. 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. 3 (D.3. Inc. 1991). the reinsurer’s exercise of the right is discretionary. 762 F. Co. 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. April 13. 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.05[2][c]. also noting that “the correspondence may well constitute proprietary information” [Potomac Elec.. 566. Power Co. These rights are embodied in “right to associate” or “claims control” clauses. Cas.. Wash. No.D. Metals of Tacoma. 587 (S. therefore. 1.R. Cal.D. 1994).Understanding Reinsurance 40.” not only give the reinsurer the right to be 40-59 . Vol. These provisions.3d 1049. 4 F. at B-1]. suit or proceeding which may involve [the] reinsurance with the full cooperation of [the cedent]” [Unigard Sec. or to control. Co. 4.. Inc. Insurance Coverage for Environmental Claims § 25. N.

13. Cigna Reinsurance Co. Certain London Mkt. However. App. 15 at A-4]. at *3-4 (2d Cir. 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. 783 A. 614 F. In the U.3d 1194. v. Some clauses go further still and give the reinsurer broad authority over claims handling. Gibbs.2d 238. Co.S. River Ins. River Ins. Super.H. N.09 above for a complete discussion of the cedent’s notice obligations and the consequences of a breach of this obligation].. 316-17 (2d Cir. 614 F. 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. Co. Reinsurers. 1985). v. reported in Mealey’s Litigation Report: Reinsurance. 1216 (3d Cir. 1996) (unpublished opinion)]. Co. Similarly. v. 1068-70 (2d Cir.05[1] above discussing the general lack of privity of contract in reinsurance arrangements].. 1995). 4 F.11 New Appleman Insurance Practice Guide 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 indemnified. Unigard Sec. 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 indemnification “for any and all loss or expense which the Reinsured may sustain by reason of having fulfilled [Reinsurers’] instruction” [La Reunion Francaise v. 2006).40. LEXIS 9578. Ins. adhered to on rehearing. Vol. 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 cedent’s insurance obligations or its settlement actions [see Slotkin v. 03-317805 (Cal.3d 1049. Co. 1979). counsel and concur provisions are usually found in clauses that provide excess limits and extra-contractual (“ECO”) coverage [see § 40. Co. see § 40. Ct. of New York. 2001).14 below for a general discussion of the reinsurer’s obligation to reimburse the cedent for these types of losses].2d 301. 17.2d 15. 239-242 (N. Home Ins. No. v.2d 301. Martin. 323. Co. t Warning: Reinsurers that choose to associate in the handling of a claim should do so cautiously. 773 F. Argonaut Ins. 1993)]. a cedent’s failure to comply with the terms of a claims control clause may provide an affirmative defense to a claim for payment [Certain Underwriters at Lloyd’s London v. 1996 U. A cedent’s failure to provide the notice required by a claims cooperation clause can arguably provide a defense to coverage [Liberty Mut.S. 17-18 (1st Cir. Citizens Cas. No. market. Nov. 40-60 . 52 F..

Ins. but see Reid v.W.. Ruffin and Granite Mut. Ins.Understanding Reinsurance 40. 469 A. where the reinsurer was engaged in a joint enterprise with the cedent in defending and settling the third-party action [Peerless Ins. see § 40. 621 (Mo.2d 614. Cross Reference: For a discussion of follow the settlements clauses in reinsurance agreements. 1958). 1033 (Pa. 1959)].. 703-04 (4th Cir. Pursell. as long as the cedent has acted in good faith. 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. 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. which obligates the reinsurer to indemnify its cedent for any losses within the terms of the original policy. Co.2d 1030. 251 F. Co. see § 40. At a minimum.17 below. 40-61 . Consider: A clause requiring the reinsurer’s consent to settlements may be in conflict with a “follow the settlements” provision. Inland Mut.2d 696. 1983)]. 329 S. Co. a reinsurer was obligated to pay its proportionate share of liability for its cedent’s bad faith failure to settle a third-party claim against its insured.11 O’Hare v. To avoid potential liability for claims handling and settlement. Cross References: For an example of a claims cooperation clause. this is especially a risk where the cedent is a fronting insurer or where the reinsurer is exposed to paying the bulk of the policyholder’s claim. v.41 below. In one case where the reinsurance contract was viewed by the court as not otherwise covering punitive damages.

and can be overridden by express wording in the certificate creating a nonconcurrency as to liability. 452 N. Am. U. Co. N. 1206-07 (3d Cir. the extent of the reinsurer’s liability is determined by the express wording of the reinsurance agreement. of N. at * 10-19 (Mass. Lexis 593. This presumption is not absolute. Facultative certificates often include “follow the form” clauses. N. App. which specifies the liability of the reinsurer and provides that the reinsurance certificate will cover only the kinds of liability covered in the original policy. v.12 Determine Extent of Coverage. Co. Republic Nat’l Life Ins. For example. App. Super. Cigna Reinsurance Co. 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. typically include a “liability” clause. 1990). Reinsurance Corp. 1982). Am.2d 462.2d 841. 52 F.32 below for examples of reinsuring clauses]. Co. Super.3d 1194.S..W. Reinsuring clauses should be drafted carefully to avoid disputes concerning the scope of coverage [N. Facultative certificates. 697 F. 447 S. in turn.2d 79. This clause specifies 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). A reinsurer will not be held liable beyond the terms of the reinsurance contract merely because the ceding insurer has sustained a loss. 842-43 (Mich. 467-69 (Tex.. Prudential Reinsurance Co. Co. of Am. v. 1997 Mass. v.30. CONSIDERING REINSURER’S OBLIGATIONS. 1997)]. As a general rule. Independence Ins. 1969)]. Ins. which provide that the reinsurance coverage dovetails with or adopts as its own the terms of the coverage of the underlying policy. Lexington Ins. Am. Ct. Ins. v. 40. in both treaties and facultative certificates. 40.31 and 40. Ct. Ins.. Co. Millers Mut.. Fire 40-62 . River Ins. v. v. 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. Co.W. Co.V. Civ. Co. The “reinsuring” or “business cov- ered” clause of a reinsurance treaty typically determines the extent of the reinsurer’s liability to the cedent [see §§ 40.. & Cas. for Prop. 81 (2d Cir. however. 1995)]. Example: A reinsurer was not liable to cover a payment for lost cargo under a facultative certificate 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.

LEXIS 21829. requiring only that the cedent make the underlying payment in 40-63 . the negotiated coverage limits of the reinsurance certificates would be rendered meaningless” [Travelers Cas.12 Ins. 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.R. 1983 U. allowing them some measure of certainty in calculating expected reinsurance recoveries and discouraging reinsurers from challenging a cedent’s coverage decisions [See §§ 40. Example: A cedent’s 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. These clauses operate primarily for the benefit of cedents. Co. at *31 (M. This argument is usually unsuccessful because the general doctrine of follow the fortunes/ settlements must yield to the express terms of the reinsurance agreement. 2004)]... 1983)].19 for a complete discussion of follow the fortunes and follow the settlements clauses].N. Co. Fortress Re. v. Dist. Constitution Reinsurance Corp..C. 12.Understanding Reinsurance 40.S. LEXIS 27961.I.Y. v.S. 40. at 46]. Mich..S.17. Inc. 1971)]. 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. Employers Reinsurance Corp.18 and 40. v.2d 520. The cedent also had failed to demonstrate that the losses actually occurred during the coverage period of the certificate [id. Example: A reinsurance certificate referring to the direct policy’s 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. Ct. Inc. 322 N.Y. 2004 U. Dist.D. Example: Indemnity under facultative certificates was limited to the amounts expressly stated in the certificates 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. at *43 (D. Cedent’s Perspective: Many reinsurance contracts include “follow the fortunes” or “follow the settlements” clauses. 524 (N.D.S. 2004)]. Sup. at *13 (E. 2004 U. Co. a loss not reinsured under the facultative certificate [Affiliated FM Ins. LEXIS 14685. Co. Aug. Dist.. and Sur.

2005)]. 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. Cal. Aetna Cas. otherwise. 2005 U. Example — Declaratory Judgment Expenses Recoverable: Reinsurance certificates providing for coverage of “expenses” incurred in the “investigation and settlement of claims or suits” was ambiguous. 1982). 2003)]. 80-81 (2d Cir. N. Ceding insurers often seek indemnity from their reinsurers for declaratory judgment expenses. however... Dist.13 Consider Obligation to Reimburse Insurer for Declaratory Judgment Expense. v. Ins. A reinsurer’s obligation to reimburse its cedent for declaratory judgment depends on the wording of the reinsurance contract. LEXIS 4974. at *32-48 (D. Swiss Re Am. Ins. Co. Co. Gen. v. many cedents argue that they are invested with a zone of discretion to make loss payments in good faith. 1990). 913 (2d Cir. Co. The most recent reported decisions evidence a trend toward allowing cedents to recover declaratory judgment expenses. Mass. 697 F. These legal expenses can arise when either the insured or the insurer initiates a lawsuit to determine whether a claim is covered. 903 F. for Prop. LEXIS 43650. importantly. & Cas.13 New Appleman Insurance Practice Guide good faith and exercise ordinary prudence.2d 79. 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. Cash call clauses can provide for reinsurance payment to be made before. Example — Declaratory Judgment Expenses Recoverable: There was “no question” that the allocated loss expense provision requiring payment 40-64 . v. [Bellefonte Reinsurance Co. Am.D. 40.. Commercial Union Ins. or at the same time. 2003 U.2d 910. Am. the reinsurance contract wording controls in all circumstances.S. Consider: Some reinsurance agreements include “cash call” provisions.S.40. Dist.. Co. Co. & Sur. after consideration of evidence of custom and usage. Corp. Even in the absence of a follow the settlements provision. v. often its definition of “allocated loss expenses” to be paid by the reinsurer. the ceding company makes a payment to its insured. so counsel must evaluate the language of the particular reinsurance agreement carefully. at *31-33 (N. the court found that the disputed language covered the declaratory judgment expenses sought by the cedent [Fireman’s Fund Ins. Reinsurance Corp.

bad faith) conduct and was not an exclusion of declaratory judgment expenses [id.. 2002). if any. at 1]. v. 89-2411 (Mass.” required payment of fees and expenses incurred in a declaratory judgment action [Employers Reinsurance Corp. Wis.2d 878. Co. 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 cedent’s extracontractual or tortious (i.. interest upon judgments. 1998). 1235-36 (D. 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. No. made or adopted by the reinsured.D.. including court costs. 256 F. 24. v. Ct.” defined as “all payments under the supplementary payments provision of [the ceding insurer’s] policy. 2d 1221. Constitution Reinsurance Corp. Reinsurance Co. endorsement (except change of location). Example — Declaratory Judgment Expenses Not Recoverable: Recovery of declaratory judgment expenses was denied where the reinsurance certificates included a clause stating: “[t]his Certificate of Reinsurance is subject to the same risks. 40-65 . Am. Mid-Continent Cas. Sept. Co. Co. of Wausau v.13 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. 358 F..Understanding Reinsurance 40. so evidence of industry standards and customs was reviewed to determine contractual intent [Affiliated FM Ins. v. Co. No. 2003)].. Super. Vol. and allocated investigation. 626 N. valuations. assignments and adjustments as are or may be assumed. Constitution Reinsurance Corp. 2d 923.]. 1994). and loss. 9. 2004)]. 881-82 (Mass. reported in Mealey’s Litigation Reports: Reinsurance. 925 (W. aff’d. 202 F. Kan. Supp.e. adjustment and legal expenses.3d 757.E. 768 (10th Cir. conditions. 10. Example — Declaratory Judgment Expenses Recoverable: A reinsurance provision requiring reimbursement of “claim expenses. Example — Declaratory Judgment Expenses Recoverable: A facultative certificate 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. Supp.

D. Ins. Cross References: For a discussion of the equitable and policy arguments advanced by cedents and reinsurers in disputes over reimbursement of declaratory judgment expenses.A. 697 F. or for the extra-contractual obligations (“ECO”) of the cedent. Seguros La Republica.D.40.14 Consider Obligation to Reimburse Insurer for Extra-Contractual Obligations and Excess of Policy Limits (“ECO/XPL”) Damages. Co. On appeal. 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. Supp. 2001)]. Reinsurance Corp. Appleman on Insurance 2d § 106. & Cas.06[6]. v. a court may conclude that the reinsurer has acted as a “co-insurer” or joint venture. unless the reinsurance contract is interpreted as covering that exposure [see Reliance Ins. 506 F. 342 F.D. S. Ins. for Prop. Dist. Cedents can secure XPL or ECO coverage by including clauses in their reinsurance contracts that specifically address these obligations. reinsurers are required to indemnify ceding insurers only to the extent that the ceding insurer’s payments or losses are within the scope of the original policy’s terms [Am. Am. 2001 U. Ins. N. 196 F. v. Lathrop.2d 696.3d 78. 1050 (E. Supp. v.A. Co. 81 (2d Cir. thereby subjecting itself to liability for losses in excess of the stated policy limits [see Peerless Ins. that is. 1959)]. Eric Mills Holmes. Inland Mut. Co. Gen..Y.14 New Appleman Insurance Practice Guide hereunder is payable pro rata with the reinsured and at the same time and place” [British Int’l Ins. that is. 553. the court rejected the reinsured’s argument that the certificates were ambiguous with respect to recovery of declaratory judgment expenses because the word “expenses” did not appear anywhere in the certificates [British Int’l Ins.. & Cas.S. Co. v.6. Seguros La Republica. 703-04 (4th Cir. 82-83 (2d Cir. 9 Bad Faith: As a general rule. Co..2d 79. Co. A reinsurer will not be held liable for payments in excess of policy limits (“XPL”). Am. Insurance Coverage for Environmental Claims § 10. Most cedents request these provisions to address the risk that tort claims against 40-66 . LEXIS 11453. Co. 40. 1042. 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. In those circumstances.. 1980)]. v. payment for what is sometimes called “thirdparty” bad faith.. Mo. S. 1958). 1982)]. 251 F. see Mitchell L. at *2 (S.N. Pa. v. Fid. 2003)]. 560-61 (W.. payment for “first-party” bad faith. but see Employers Reinsurance Corp. Co.

Understanding Reinsurance 40. The reinsurance contract usually limits the amount paid by a reinsurer on an XPL claim to an amount within the overall reinsurance limit. [See § 40. [See § 40. A reinsurer could assert that.2d 930. because the state’s public policy prohibits insurance for punitive damages. 550 N. Am.Y. an ECO clause may be drafted to cover a ceding insurer’s exposure when its insured is found liable to a third party for punitive damages.] 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-insurer’s obligation to act in good faith relative to its own insured.43 for an example of an ECO clause. Corp.44 for an example of an XPL clause included in a reinsurance treaty. public policy concerns preclude insurance indemnification for punitive damages awards [see Home Ins. An XPL clause covers payment by a cedent arising from a judgment against its insured in excess of the reinsured’s policy limits. 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. extra-contractual obligations incurred by the cedent are “extra” or outside the coverage provided by the policy. rather than indirectly on account of its failure to resolve the policyholder’s liability to others. Inclusion of XPL and ECO clauses removes the uncertainty as to whether such losses will be covered under the reinsurance contract. Co. ECO clauses can provide for indemnification of payments to an insured for punitive damages and emotional distress caused by the cedent’s tortious conduct or failing to treat the insured fairly and in good faith. Home Prod. By definition. v.] In addition. For example. fraud or bad faith in handling the claim or in the settlement or defense of the lawsuit against the insured. where the size of the judgment was affected by the cedent’s negligence.. 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. 932 (N. but otherwise covered. reinsurance for punitive damage 40-67 . t Warning: In some states.E. though this may be more probably understood as an XPL exposure. An XPL clause specifically 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.14 their insureds will not be resolved within applicable policy limits following the cedent’s unreasonable failure to effect a settlement or that bad faith claims will be directed at the cedent’s conduct in handling the insured’s claim for coverage. 1990)].

Insurance Coverage for Environmental Claims. if a ceding insurer pays punitive damages in circumstances where the legality of indemnification is unsettled. However.06[3]. which governed the international arbitration. Lloyd’s Syndicate.14 New Appleman Insurance Practice Guide awards also should be prohibited. The court ruled that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. z Strategic Point: The specific language of ECO or XPL clauses can vary and make a significant difference in the coverage afforded. Lathrop. 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. a reinsurer may be obligated to follow the fortunes of its cedent and provide reimbursement.40. 1997 U. Co. 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 indemnification of punitive damages [Hartford Fire Ins. at *14-18 (D. 40-68 . Mitchell L. 1997)]. Cross References: For discussions of circumstances under which reinsurance potentially covers punitive damages. Further. Parties to the reinsurance agreement should draft these provisions carefully to ensure appropriate coverage and to avoid disputes. see Eric Mills Holmes. preempted Connecticut law. v. § 10. Dist. LEXIS 10858. Conn.5. Appleman on Insurance 2d § 127. despite Connecticut’s public policy against insurance for such awards.S.

Specifically. instead.2d 268. Ins. Arkwright Mut. United Fire & Cas. the reinsurer is dependent upon and must be able to rely on the cedent to perform these functions. 2d 632. Unigard Sec. v. 1999)].15 Consider Insurer’s Duty to Disclose to Reinsurer All Material Facts About Risk Being Reinsured. Mut. 1990)]. 617 F. Great Am... The law and practice of the reinsurance industry recognize that the relationship between parties to a reinsurance agreement is characterized by “uberrimae fidei” or “utmost good faith. 44 F.3 (9th Cir. Co. 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. Puerto Rico Ports Auth. 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 other’s legal liability under the contract.VI. 2000) § 3. v.. A reinsurer is not intimately involved in underwriting the ceded business or in handling claims subject to the reinsurance agreement.3d 826. utmost good faith means that the maxim caveat emptor does not apply to the reinsurance relationship [Barry R. Ins. Ins. 1995). The doctrine is most often referenced in terms of the cedent’s duty to disclose material facts about the risk that the reinsurer is reinsuring [A/S Ivarans Rederei v.. CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE FIDEI.01[a]. but has to rely on the cedent to do so. 979 F. 53 F. 40. particularly in terms of affirmatively disclosing material facts about the ceded business during the reinsurance placement process. 829 n. 278 (2d Cir. Co. Corp. The facts and circumstances of the reinsurance relationship are important in determining the existence and scope of the duty. 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 . v. it is a mutual obligation [Mich.2d 903. 905 (1st Cir. 1980)]. 642 (S. citing Black’s Law Dictionary 1520 (6th ed. Supp. 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.N. 1992)].D. Co. Ins. Modern Reinsurance Law and Practice (2d ed.” which entails mutual trust and regard for the interest of the other party. Co. Ostrager and Mary Kay Vyskocil. Co.Y. Although cases regarding the doctrine of utmost good faith focus primarily on the cedent’s duties to the reinsurer.

. 979 F. Co. 665 F. 1981). for example. 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. Co.. of N. Calvert Fire Ins.3d 56. Co. v.Y. The duty of utmost good faith also applies to the relationship between a retrocedent and its retrocessionaire [Compagnie de Reassurance D’Ile de France v.2d 239 (8th Cir. Ins. Prior significant losses or legal actions against the insured. 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. Corp. 1990)]. 1980)]. 526 F. Under typical circumstances. 320 (N.E. 57 F. The underwriting agent’s role.. Cologne Reinsurance Co. v. Co. Ins. 143 (N. 674 N. 320 (N.. 485. Co. 107 U.E. Ocean Ins. Ins. 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.. The following are additional types of information that have been found to be material to the underwriting process: • • • • • The premium rate.Y. The geographical spread of the underlying risks. 674 N. Ins. Ltd. Hence. 1996)]. “[w]here the reinsured has offered extended coverage or an unusual term” [Sumitomo Marine & Fire Ins..Y.40. New England Reinsurance Corp.15 New Appleman Insurance Practice Guide the value of the risks” [Sun Mut. the intermediary is the agent of the ceding company. Unigard Mut. 66-70 (1st Cir. of N. 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 .2d 313. 623 (D.. Great Am.S.2d 313. Ins. 510 (1883)]. Co. at 279. volume or sufficiency. Co. 1995)]... Co. Co. Neb. 1996)]. Supp.Y. v. 552 N. Castle Reinsurance Co. In re Liquidation of Union Indem.E.2d 139. Ins. Whether the reinsurance intermediary is an agent of the cedent or the reinsurer is a fact based inquiry. v.Y. Disclosure is required. and The type of business ceded. v.2d.

. 278.S. Ins. 244 (8th Cir. Matters would have been different had [the cedents] affirmatively misrepresented their intended underwriting practices or given incomplete. Kansa Gen. and the reinsurer’s misrepresentation claim was properly dismissed [Christiania Gen. 9.2d 238.Understanding Reinsurance 40.D. 57 F. one would not expect [the cedents] to volunteer a plethora of details on their proposed underwriting practices. 1998)]. 1992). at *22 (W. Example: Substantial evidence of material misrepresentations sup- ported a jury verdict where the cedent hid from its reinsurer the dangerous nature of the insured’s business. 282-83 (S. Corp.Y. Cas. Co.2d 268. For example. Co. . Co. Ins. 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.3d 56. 1972)]. evasive or incorrect answers to questions asked . the failure to disclose this information did not deprive the reinsurer of the same opportunity the cedent had to assess the risk. Ins. Excess Ins. 1992 U. 1992)]. 1995). Ins. Co. in rejecting certain claims of fraudulent inducement.D. Examples: Some courts have found that reinsurers have a duty to investigate the reinsurance transaction. Great Am. Code § 622]. Example: Where the ceding insurer had no reason to believe that its reinsurer would consider the direct insured’s distribution of ATV’s material to the nature of the risk because the insurer itself did not view it as such when the reinsurance contract incepted. Ins.. Wash. App. 665 F. aff’d 1994 U. v.. 992 F. Co. Ltd. 245-46 (8th Cir. Consider: In some states.N. see also Old Reliable Fire Ins.. 280 (2d Cir. the First Circuit Court of Appeals stated: “[w]ithout first being asked by the other party. 1981). v. 471 F. v.2d 239. and the reinsurers had previously informed the cedent that they considered compliance with the survey report recommendations to be material [Allendale Mut.15 connection with the underwriting of an earlier insurance policy. Mut. Co.. v. the duty to disclose all material facts to the reinsurer is required by statute [see Cal. misstated the insured’s previous loss record and did not reveal the nature of the underlying insurance [Sec. 80 (1st Cir. Consider: It has been argued that a cedent’s duty to disclose informa- 40-71 . Co. 241. Affiliated FM Ins. New England Reinsurance Corp.” [Compagnie De Reassurance D’lle de France v. Ins. Unigard Sec. 1994)]. v.. .. LEXIS 35914 (9th Cir. LEXIS 20677. Supp. 979 F. Co. Castle Reinsurance Co. Nov. .S.. Dist. Ltd.

Co. see § 40. v. For example. Dunham.D.40. Ostrager and Mary Kay Vyskocil.)..01[4].. Utmost Good Faith in Reinsurance: A Tradition in Need of Adjustment. 1336 (11th Cir. 1548.Y. 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. the reinsured owes the reinsurer the highest duty of fair dealing and utmost good faith throughout the reinsurance relationship” [New York Insurance Law § 15. 1069 (2d 40-72 . Jr. 1991)].. Nw. Co. Appleman on Insurance 2d § 105. because the reinsurer places complete trust in the underwriting capability. a cedent’s 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 reinsurer’s preclusion from second-guessing the reinsured’s good faith claims decisions. 40. Unigard Sec. Lathrop. 10. Group v.16[1] New Appleman Insurance Practice Guide tion to its reinsurer is broader in treaty relationships as compared to facultative relationships. Bankers Ins. 703. 1571 (June 1992)]. Ins.16 Consider Application of Duty of Utmost Good Faith Beyond Disclosure at Inception of Reinsurance Relationship.3d 1049. Co. Eric Mills Holmes. 40.16[2] Application of Duty of Utmost Good Faith to Underwriting and Administration of Ongoing Business. 1999).02 (Walcott B. River Ins. Inc. Steven W.05.. Nat’l Ins. claims-handling ability and general integrity of the reinsured.5. 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. 40. ed. Neptunia Ins. v. Modern Reinsurance Law and Practice § 3. 705 (S. Thomas. Many courts considering what constitutes good faith in the context of a ceding insurer’s payment or settlement of claims have concluded that negligence alone cannot establish bad faith [Am. 41 Duke L. see Mitchell L.N. 198 F. 775 F. the cedent’s duty to disclose all material facts is not just relevant in the contract formation stage of the reinsurance relationship: “[i]n fact. Marine Ins.18 below].J. The mutual duty of utmost good faith extends to the parties’ actions during the entire course of the reinsurance relationship.3d 1332. Cross References: For discussions of the doctrine of utmost good faith and cases considering its application. Insurance Coverage for Environmental Claims §§ 10. 2000). N.. Moreover. Supp.16[1] Application of Duty of Utmost Good Faith to Parties’ Conduct During Life of Reinsurance Contract.03[a] (2d ed. 4 F.

New England Reinsurance Corp. 2006 U.. Co. Co. Inc. 4 F. 2006)]. businesslike investigation before paying a claim. 1995)]..N. 1212-17 (3d Cir. 52 F.3d at 1069]. 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. 1995)]. Co. Gen. which established an orderly mechanism for the application of insurance policies to underling asbestos-related bodily injury claims. Certain Underwriters at 40-73 . The appellate court found that mere negligence could not support a violation of the duty. 79-82 (1st Cir. Accident Ins. LEXIS 48209. gross negligence or recklessness [Unigard Sec. River Ins. Ins. Co. 1993)].. Example: The Third Circuit Court of Appeals reversed the District Court’s finding that a ceding insurer breached its duty of good faith by agreeing to participate in the Wellington Agreement. Dist. River Ins. CIGNA Reinsurance Co. 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 D’Ile de France v.3d 56. at *84-86 (D. Example: Reinsurers sufficiently alleged claims for breach of reinsurance contracts based on proven “irregularities” in the cedent’s underwriting [Int’l Ins.J. 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. 57 F..S.. v.3d 1194.Understanding Reinsurance 40. Co. v. that none of the cedent’s 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 certificate) [N. N. and by failing to schedule the underlying policies according to the Agreement in order to avoid paying defense costs.16[2] Cir. The cedent’s superficial investigation of claims stemming from implantation of a heart valve. failure to obtain technical advice as to whether injury occurred during the policy period. the appropriate standard for bad faith in these circumstances is deliberate deception. v. Instead.

2d at 240-41. N. 2001)]. 36 (N.3d at 1069]. 1069 (2d Cir. at *3-7 (E. Ins.S. Norad Reinsurance Co. Therefore. Co. Inc.. 1991)]. River Ins. 1993). 17.D. Dist.16[3] New Appleman Insurance Practice Guide Lloyd’s London. Home Ins. 783 A.. Co.D. 21 at 4]. 1988)]. Ltd. 18. Dist. Reinsurers rely on their cedents for the information necessary to properly assess risks.40..S. Co. 2007). N.16[3] Application of Duty of Utmost Good Faith to Obligation to Give Notice of Claim. Marine & Inland Ins. Co. Feb. Example: A federal District Court confirmed two arbitration awards reducing the amount of reinsurers’ participations in treaties. v. June 28. 40. v. U. LEXIS 12948. Co. Cal. “[I]f a ceding insurer has implemented routine practices and controls to ensure notification 40-74 .09 above]. Vol. Ill. No. LEXIS 6277. Co. see § 40. 240 (N. Co. 783 A. for a discussion of the ceding insurer’s notice obligations and late notice as a defense to payment of reinsurance obligations.. 1988 U. where the cedent had made cessions to the treaties that were not of the type of business that it represented would be produced [Mut. No. 4 F. 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 Lloyd’s London v. 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...2d 238.. Co. a cedent’s 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. 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 Nat’l Ins. 07-01458 (C. 1991 U. reported in Mealey’s Litigation Reports: Reinsurance. In most states. Inc. Home Ins.. Ins. v. Co. Certain Underwriters at Lloyd’s London v. v.D. River Ins. Life Ins.H. 4 F. at * 18. Fire..S.3d 1049. Pa.

v. Ins. Arkwright Mut. 53 F. the insurer has not acted in bad faith. Commercial Union Ins. v.16[4] to reinsurers but inadvertence causes a lapse. Co. Inc. . Pa. River Ins. 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 cedent’s claim. Supp. Ins. aff’d.3d at 1070]..3d 33 (1st Cir. 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. Among other things. procedures and controls. made no effort to determine what its duties were under the reinsurance agreement and failed to give timely notice of a significant claim in violation of the agreement’s claims control clause [Certain Underwriters at Lloyd’s London v. Example: A cedent’s 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.D.N. Co. dependent on its ceding insurer for information. N. 1995 U. Mass. 783 A. v.Y. Co. requires a reinsurer to indemnify its cedent for losses that are even arguably within the scope of the coverage reinsured.S. Ins. 1995). 2000)]. at 1069-70].. Most of the cases dealing with the reinsurer’s duty of utmost good faith to its reinsured involve obligations to make payments under reinsurance agreements [Arkwright Mut. v. Co. Co. Home Ins. A reinsurer. Supp. 1999)]. 1998). of Pittsburgh.16[4] Application of Duty of Utmost Good Faith to Reinsurer to Pay Under Reinsurance Agreement. at *14-15 (S. 69-70 (D. . 4 F. the reinsurer raised constantly shifting defenses and objections to payment and 40-75 .Y. 217 F. Dist. Co. LEXIS 11. Nat’l Union Fire Ins.” and the failure to provide notice to the facultative reinsurers was merely negligent [Unigard Sec. “Utmost good faith . then it has willfully disregarded the risk to reinsurers and is guilty of gross negligence.. But if a ceding insurer does not implement such practices and controls. 9 F. Co. Co.Understanding Reinsurance 40.N. 642 (S.D. Example: A reinsurer was relieved of its obligation to indemnify its reinsured where the reinsured failed to implement notification practices. Co. 2d 632. 2d 49. Seven Provinces Ins.2d at 240-42].. should be able to expect at least this level of protection” [id.. 40..

Ill.16[4] New Appleman Insurance Practice Guide unreasonably questioned the cedent’s settlement allocation [Commercial Union Ins. In one case.. 1991)]. 2d at 64-65].40. Certain Underwriters at Lloyd’s London. Co. t Warning — Reinsurers: Reinsurers may violate the duty of utmost good faith in other circumstances. v. 914-16 (8th Cir. LEXIS 12911. v. Dist. A federal district court refused to dismiss the cedent’s claim for breach of contract.D. Co. 478 F. 1991 U. Supp. 9 F. 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. stating that it may be able to prove that the “customs and practices of the reinsurance industry include preservation of confidences” [Int’l Ins. Co. Seven Provinces Ins.3d 908. Denial of the cedent’s bad faith claim was reversed. 40-76 . a reinsurer may have breached an implied term of the reinsurance contract when its attorneys disclosed confidential information obtained from the ceding insurer by filing it in a court file accessible to the public without first attempting to file it under seal. 2007)].S. Columbia Cas. at *5-12 (N. Co.. as the appellate court found that if the reinsurer’s selection of a particular method for calculating the amount of incurred loss was specifically designed to trigger a contractual provision enabling the reinsurer to avoid its payment obligation it would have acted in bad faith [BJC Health Sys. 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 benefit of its bargain. v. Consider: One reason for the reinsurer’s duty to exercise utmost good faith in its relationship with a cedent is the permission to examine the cedent’s records that is granted by the access to records provision of the reinsurance contract.

2d 49. 197 F.. River Ins.8 (S. River Ins. 978 n. there would be no reinsurance liability unless a claim was expressly covered under the direct policy. LEXIS 45027. while the ’follow the settlements’ doctrine requires reinsurers to abide by a reinsured’s good faith decision to settle.. 40. Ins. 9 F.VII. 1995). Ltd. Certain Underwriters at Lloyd’s. Co. Supp. CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE SETTLEMENTS. v.S. London. 2006)]. at *9 n. 1205 (3d Cir. but “the term ’follow the fortunes’ more accurately describes the reinsurer’s obligation to follow the reinsured’s underwriting fortunes.D. the coverage case likely would have to be tried again. 535 n..3d 529.D.. Ohio 2002)]. of Cal.g.16 above]. Nat’l Am. The parties’ continued good faith is manifested in the “follow the fortunes” and “follow the settlements” doctrines. 93 F. N. Co. Co. Lexington Ins. Although many U. Mass. Co. The provisions operate primarily for the benefit of cedents.15 (9th Cir. 1996). If the ceding insurer settled a coverage dispute and the reinsurer denied liability. court decisions fail to distinguish between following fortunes and following settlements [see. 2d 972.. CIGNA Reinsurance Co. Seven Provinces Ins. rather than litigate. Tex. 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. If the follow the fortunes/settlements doctrine did not apply. v. v. 1998)]. Co. 52 F. Supp. allowing them some measure of certainty in calculating expected reinsurance recoveries and discouraging reinsurers from challenging a cedent’s coverage decisions and the amount of any settlement. Dist.17 Understand Distinction Between Follow the Fortunes and Follow the Settlements. 1199. v. June 15. claims on that policy” [Commercial Union Ins.3d 1194. e.S. Co.15 and 40.. 2006 U. The phrases are often used interchangeably. whereas ’follow the settlements’ refers to the duty to follow the actions of the reinsured in adjusting and settling claims” [N. as long as the cedent has not acted in bad faith. 66 (D. “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. 40-77 .1 (S. Houston Cas. there is a meaningful distinction between the two concepts. v. As one court explained: “[t]he ’follow the fortunes’ doctrine requires reinsurers to accept a reinsured’s good faith decision that a particular loss is covered by the terms of the underlying policy. Employers Reinsurance Corp. Co. see §§ 40.

2d 217. Employers Reinsurance Corp. Co. & Sur. Supp. Co. at *16-17 (N. N. v. 1995). cf. 1995). practice and case law tends to conflate follow the fortunes and follow the settlements clauses. 2007 U. River Ins.N. have refused to imply such a duty [see Am. Certain Underwriters at Lloyd’s.. v. “Follow the fortunes” clauses do not override or alter express coverage limits in a reinsurance certificate. v.D.S. 868 F.. i. 1199 (3d Cir. Supp. Supp. Co. Dist. Cal. Am. Re-Insurance Co. Ins. 52 F.S. LEXIS 41257 (N. 1328.e. Co. Ohio 2002) (applying New Jersey law). Int’l Surplus Lines Ins. Employers Reinsurance Corp. 920 (S. 197 F..M. 2005)]. Co. especially English precedent which may govern reinsurance contracts or inform the thinking or approach of reinsurance arbitrators. counsel should not expect that other jurisdictions do not draw sharper distinctions between the two. 1349 (S. 227 (D. Home Ins. based on the custom and practice of the reinsurance industry [see Aetna Cas. River Ins. Ceding insurers that know their settlement decisions cannot be freely challenged have more incentive to settle with their insureds and avoid costly litigation. Home Ins. Motorists Ins. 2d 972... 1995)].D. v. 882 F. London. Supp. Dist.D. 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. v. Other courts.17 New Appleman Insurance Practice Guide t Warning: Although U.3d 1194. CIGNA Reinsurance Co. 369 F.Y. & Sur. Supp. 1346 (S. v. Co. the ceding insurer’s interpretation and application of its policy to the underlying claim cannot be revisited by reinsurers or the courts.Y. a reinsurer will be obligated to reimburse a cedent for a settlement or judgment paid by the cedent in good faith. 1328.. Affiliated F..D. Co. Aetna Cas. Cal.D. Ohio 1994)]. however. Re-Insurance Co.S. Under the “follow the settlements” doctrine. 2006).40. 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. Co. Absent exceptional circumstances. 986 (S.R. but a reinsurer’s liability is still limited to losses covered by the direct policy and not excluded by the reinsurance agreement.. 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 reinsured’s liability to its insured [N. This issue has been hotly contested in recent litigation [see Am.N. a follow the settlements provision does not require the reinsurer to indemnify for ex gratia payments. Co. 882 F. Ins.D. v. 2007) (where 40-78 . Co. 2006 U. Am.I. v. LEXIS 95801. The “follow the fortunes” obligation is broad. 917.

08[5]]. v. Follow the fortunes and settlement obligations also apply to a retrocessionaire in its agreements with a retrocedent [Am.. Bankers Ins. and to make adjustments and settlements in conformity with its interpretation” [Aetna Cas.5[D]. Nat’l Ins. 198 F. “Follow the fortunes” and “follow the settlements” clauses help define the scope of the reinsurer’s indemnification obligation in terms of a specific loss. Appleman on Insurance 2d §§ 106.18 and 40. 1328.19 below]. under which the reinsurer agrees to indemnify the cedent as if the reinsurance certificate adopted or incorporated the terms and conditions of the reinsured policy [for a discussion of “follow the form” clauses. Although most disputes are resolved in reinsurance arbitrations. while a “follow the form” provision confirms that the reinsurer’s undertaking is in step with that of the cedent. where the opinions are typically confidential.. Co. Business Insurance Law and Practice Guide § 14. 1349 (S. 882 F. see Eric Mills Holmes. of Fla.3d 1332 (11th Cir. see § 40.12 above].18 Consider Reinsurer’s Preclusion from Second-Guessing Reinsured’s Good Faith Claims Decisions. The “follow the fortunes” and “follow the 40-79 . Co. 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. Distinguish: Many facultative certificates include a “follow the form” provision.D. 1995)]. Home Ins. several courts have published decisions considering this issue.N. the follow the fortunes/settlements doctrine vests in the ceding company the right to decide what the scope of coverage actually is when the cedent’s policy is subject to more than one reasonable interpretation. see §§ 40.2 and 102.Understanding Reinsurance 40. 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 certificate of reinsurance). [For examples of decisions involving reinsurer’s obligations under “follow the fortunes” or “follow the settlement” provisions.Y. Supp. 40.18 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. 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. v. Co. & Sur. Co. “follow the settlements” provision cannot be read into a certificate of facultative reinsurance contract as a matter of law)]. Nw. 1999)].

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New Appleman Insurance Practice Guide

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. Nat’l 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), aff’d, 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. Nat’l 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 insurer’s 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

Understanding Reinsurance

40.19

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 cedent’s 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 cedent’s post-settlement allocation decisions, even if there is an inconsistency between the cedent’s 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 specific terms of the reinsurance contracts.
Example: A facultative reinsurer was bound to pay its share of the

direct insurer’s settlement of certain products liability claims under the certificate’s “follow the fortunes” clause. The court interpreted the 40-81

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New Appleman Insurance Practice Guide

“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 cedent’s allocation of the settled claims to the reinsured policy was “at least arguably correct, and therefore . . . could not have been unreasonable” [Nat’l 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 reinsurer’s challenges to the ceding company’s 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 cedent’s 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 cedent’s 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 finding of bad faith” [id. at 193]. Example: A reinsurer disputed its cedent’s 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 reinsured’s 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 specific factual information informing settlement negotiations and would undermine the

40-82

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. 2d 251. 327-29 (N. 760 N. Certain Underwriters at Lloyd’s of London. at 326-27]. Co. In a trial of one site at issue. The court determined that the treaties’ definition of “disaster and/or casualty” as “resulting from a series of accidents. where the language of the treaties did not support such allocation [Travelers Cas. 2000)]. there would have been no reinsur40-83 . v. 2001)]. The cedent’s classification of the settlement as a single occurrence. 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. at 328]. however. In the subsequent settlement of 16 additional sites. when it came time to cede its losses under facultative reinsurance agreements. Supp. the court found that one of the individual sites constituted seven occurrences. Example: The Appellate Division of the New York Supreme Court reversed the trial court’s grant of summary judgment to the cedent.. the cedent took the position that each site constituted a single occurrence.19 certainty that the general application of the doctrine to settlement decisions creates” [id.Y. occurrences and/or causative incidents” incorporated spatial boundaries and precluded aggregation of environmental losses that occurred at various sites across the country [id. Had the cedent billed the losses based on the same number of occurrences determined in the underlying coverage action. v. where there were facts that could support the inference that the cedent’s conduct in allocating environmental liability to only one site was grossly negligent or reckless. Example: A federal district court denied a cedent’s motion for summary judgment on its claim for indemnity from its reinsurer premised on a “follow the settlements” provision in facultative certificates. Example: The New York Court of Appeals rejected a cedent’s argument that “follow the fortunes” clauses in reinsurance treaties permitted it to recover under a single occurrence theory. Co. which was premised on the “follow the fortunes” doctrine. and Sur. the cedent took the position that there were 95 occurrences in all.2d 319. The court emphasized that the “follow the fortunes” clause could not override the specific language of the reinsurance contracts [id. Conn.Understanding Reinsurance 40. 98 F.]. Columbia Cas. Co. 258-60 (D. where there were claims from over 50 different sites. During an insurance coverage dispute.E.

Whether an underlying allocation is consistent with applicable state law. 40-84 . 2.19 New Appleman Insurance Practice Guide ance recovery because no single occurrence would have breached the reinsurance retention. June 12.40. 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. The Appellate Division reversed this decision finding that “[a] reinsurer is not bound by the follow-the-fortunes doctrine where the reinsured’s settlement allocation. Whether more than a single occurrence limit has been paid to the insured to settle the liability. at odds with its allocation of the loss with its insured. designed to minimize its loss. z Strategic Point — Cedents: The following factors may influence what allocation position a cedent should take in seeking indemnification from reinsurers: 1. Co. 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. Div. v. 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. App. 05170 (N. 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 cedent’s settlement process. N. Consider: Most allocation disputes are decided in arbitration. 5. Home Assurance Co. reflects an effort to maximize unreasonably the amount of collectible reinsurance. 6.Y. 1st Dept.Y. If there is an environmental cession. and if so whether any of the settlement amount should be allocated to known and/or unknown future claims (or to bad faith).. Slip Op.” Allstate Ins. Whether the settlement is a policy buy-back. 2007). Am. rather than litigation. 4. 3. Whether there are annualization of limits issues...

Reinsurance companies are generally known as either direct markets or brokered markets. Direct markets operate through salaried employees of ceding insurers and reinsurers who negotiate and bind reinsurance contracts.. Reinsurance brokers perform many of the same functions as brokers in the direct insurance market.W. courts have stated that the broker must conduct a diligent inquiry that is consistent with industry standards [id. although the intermediary commission is generally paid by the reinsurer. 255 N. 123 (6th Cir. Co. This requirement exists as of the time the broker issues the policy [see Cherokee Ins.20 Brokered vs. Reinsurance intermediaries often serve as a conduits for communications between cedents and reinsurers. 66 F. many states have enacted statutory schemes similar to the National Association of Insurance Commissioners (NAIC) Reinsurance Intermediary Model Act (“NAIC 40-85 . 1977)]. Blanch Co. Inc.J. For example. it is generally required to fulfill its client’s reinsurance needs with reasonable care. Direct Market.3d 117.]. reinsurers assume business by dealing with brokers or intermediaries. Cormany & Bird. 1980)]. v. z Strategic Point — Cedent: Although a reinsurance intermediary’s duties may be limited by specific instructions from the ceding insurer. Co.. Inc. transmit payments. 265 (D.. 8 B. E.W. 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. conveyance of attorney advice and the like concerning the submission of claims for indemnification. the intermediary is held to be the agent of the cedent [In re Pritchard & Baird. 1995)]. Mut. 40. Reinsurance brokers try to secure the most advantageous terms for ceding insurers from the reinsurance marketplace. CONSIDERING BROKERED MARKET. depending on whether the reinsurers deal directly with their cedents or deal with them through an intermediary. Additional responsibilities may include drafting reinsurance contract wording and creating complex reinsurance programs tailored to the ceding insurer’s specific needs.R. 535-36 (Wis.N. A reinsurance broker or intermediary also may perform administrative functions during the operation of the reinsurance agreement. In analyzing potential liability. Under typical fact patterns. Reinsurance brokers may have functions akin to claim handlers in the gathering of information. In addition. Liab. settle losses and prepare periodic statements of account. collect sums due. In brokered markets. v.2d 533.VIII. there is case law which suggests that a reinsurance broker has a duty to determine whether the reinsurance company the broker is recommending is financially solvent [Master Plumbers Ltd.

1999). Supp. 2d 161. Where the broker or intermediary is found to be an agent of the cedent. Ct.. The general rule is that the broker or intermediary is the agent of the ceding company. Certain Underwriters at Lloyd’s London. 1997)].04[3] (Walcott B. Ins.Y. Co. Co.D. LEXIS 8916. Co.D. z Strategic Point — Cedents: A broker also can be liable for breach of an obligation to procure reinsurance for an insurer [see Nw. Adjustco. Law § 2100 et seq. Under applicable state law principles of agency law. Aseguradora Hondurena. 1997 U. 1980)]. 165 (Fla.N. Eliahu Ins. Inc. 638-39 (D. Banco Ficohsa v. 40. N. v. unless there are facts demonstrating otherwise [Houston Cas. Neb. Tex.A.. Co.N. 1999). ed. the specific conduct and relationship of the parties determines the nature and extent of agency status. 2d 789. 635-36 (La. 623. Greene & Co.Y. 11. 1995). 709 F. Ins. Tex.S. v. 1147. Co. Jr.. Nat’l Ins. § 32. v. at *18-19 (S. Supp. Supp. Co. Home Builders Ass’n Self-Insurers’ Fund v.Y. Marsh & McLennan. regulations require intermediaries to inquire into the financial status of unauthorized reinsurers. Comp. S.. Dist.. 215 Ill. 51 F. Thomas A. Code §§ 1781.21 Understand Which Entity Broker Represents. 937 So.Y. Cross Reference: For a discussion of direct and brokered reinsurance markets. Inc. Calvert Fire Ins. Certain Underwriters at Lloyd’s London. disclose any findings to the cedent and provide a copy of the reinsurer’s most recent financial statement [N. The NAIC Model Act is republished in full at Eric Mills Holmes. Certain Member Companies. Co. 88 (S. for a discussion of the regulation of reinsurance intermediaries in New York. v. the cedent may be responsible for the agent’s actions.)]. Comp. and the most critical factor is control [St.1(c). v.1 to 1781. see California Insurance Law & Practice § 11..]. 1989). 51 F. Co.D. Dist.3. Reliance Ins. 817 F. 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. v.. Codes R. 1430-34 (E. 2006)]. tit. 40-86 . Paul Fire and Marine Ins.D. Supp.D. Supp. 526 F. 1152-55 (S.21 New Appleman Insurance Practice Guide Model Act”). 2d 789. Dunham. The issue often arises as to whose agent the reinsurance broker or intermediary is with respect to a specific transaction. App. 802-05 (S. Unigard Mut. App. 886 F. 2d 630.01. Similarly. Ins.Y. La. Supp. Wis.40. 1424. Stat.D. requiring special licensing for reinsurance intermediaries [see Cal.N. 86. including misrepresentations [see Houston Cas. Co. 100/1 to 100/60. 1993)]. 1993)]. Appleman on Insurance 2d § 104. see New York Insurance Law § 15.13. 633 So. v. 799-800 (S. In New York. Ct. & Regs.

Co. payment of a premium to the ceding insurer’s agent is likely to constitute a valid premium payment on the reinsurance contract.] 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. Vol. Mut. whether or not the reinsurer knows of the payment [see ArkwrightBoston Mfrs. Paul Fire and Marine Ins. Eliahu Ins. No. see § 40. The court stated “[a]lthough in most cases 40-87 .] On rare occasions.N.21 It is also possible for a reinsurance intermediary to be a dual agent [see Capitol Indem. 10 (Sept. In most jurisdictions. [For a discussion of discovery in reinsurance arbitrations. That an intermediary functions as an agent for one party for part of the transaction. Reinsurance Intermediaries: When Are They Liable and To Whom?.E.44 below. Ins. reinsurance agreements involving intermediaries include an intermediary clause providing that the intermediary acts as the agent of the reinsurer. [For a discussion of the inclusion of non-signatories in reinsurance arbitrations. does not mean that the intermediary is the agent of both for all purposes. and the other party for a different part. 25. the reinsurer is not permitted to refuse to perform simply because the intermediary failed to transmit premium payments from the cedent). especially whether pre-hearing deposition examination is available.2d 437. Co.Y. Co. In that case. Therefore. 1989)]. 1997 U. 876 (Ill. 997)].Understanding Reinsurance 40. v. App.25 below. at *14 (S.D. [For a sample intermediary clause transferring the credit risk to the reinsurer. Example: A reinsurance broker or intermediary may serve as the agent for the reinsurer in order to receive or transmit money. Paul M. Hummer. Calvert Fire Ins. LEXIS 8916. Dist. v.. Mealey’s Litigation Reports § Commentary. Inc.] There are conflicting decisions on whether pre-hearing discovery can be compelled from an intermediary that is not a party to a reinsurance arbitration.. 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.S. with respect to transmission of payments. v. and not as the agent of the cedent.2d 872.. Co. Smith Intermediaries. 1996)].22 below. a non-signatory to the arbitration agreement such as a reinsurance intermediary may become a party to a reinsurance arbitration. 1992). 887 F.e. see § 40. Corp. Ct. see § 40. Most reinsurance agreements include an intermediary clause that sets forth the intermediary’s role in communications and its agency status in terms of receiving monies due between the parties. 593 N. 7. 440 (2d Cir.

622 N. at 1016-17].. 690-91 (5th Cir. 1993)]. Ins. Unigard Mut. Ct.10[7]. Example: A reinsurance treaty was rescinded because of misrepresentations by the intermediary. An arbitration panel rejected this claim. who was found to have been acting as the agent of the cedent [Calvert Fire Ins.2d 687. the insurer argued that the underwriters were bound by the agent’s statements about coverage during the placement process. Inc. 1015 (Ind.40.E. The fact that the reinsurers knew of and were satisfied with his underwriting did not establish the element of control necessary to the agency relationship [Aetna v. Example: The insurer entered into a general agency agreement with a company which was also “an intermediary with Lloyd’s” [Brougher Agency. 1980)]. Co. Co.D. 1972)]. This agent negotiated the purchase of reinsurance from Underwriters at Lloyd’s. Responsibilities of Insurance Agents and Brokers § 2. London. App. 623. 799-805 (S.2d 1013. 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. 40-88 . Glens Falls. 1999)]. 51 F.. and its misrepresentation of the underlying policy’s terms was made within the scope of its actual authority and voided the reinsurance policy [Houston Cas. Supp. see Bertram Harnett. Tex. In a reinsurance coverage dispute between the insurer and the Lloyd’s Underwriters. 526 F. 633 (D. Co. Certain Underwriters at Lloyd’s London. v. Co. at *5]. Supp. 2d 789.21 New Appleman Insurance Practice Guide the primary insurer is the principal and the reinsurance broker its agent. Example: A reinsurance broker was the ceding insurer’s agent. they could not be liable for any alleged fraud by the intermediary [id. United Home Life Ins. v. Because the agent was not authorized to act as the agent for Lloyd’s Underwriters. 453 F. the cases do not establish this relationship as a matter of law” [id. v. Cross Reference: For a discussion of cases considering the agency status of reinsurance brokers and intermediaries. determining that the agent had only “ministerial” authority relating to the reinsurance and no binding authority on behalf of Lloyd’s Underwriters. Neb.

State arbitration statutes. Co.” even if all parties are U.Y. appointing an arbitrator if the agreement does not so provide. Co. submitting motions before courts. §§ 3-16]. 40.S.S.IX. 45 (2d Cir. Div.S.. §§ 201-208]. 475 U. subpoenaing arbitration witnesses.S. and U. citing AT&T Techs.. 643. 744 N.S.2d 24. citizen or where the arbitration has some “reasonable relation with one or more foreign states. Inc.3d 205. citizens [9 U. Most reinsurance treaties include a clause providing for resolution of disputes through arbitration. Whether a claim is arbitrable is a legal question for a court to decide. v.22 Consider Obligation to Arbitrate. and listing grounds and procedures for confirmation. see also Contec Corp. 944(1995). is the primary source of arbitration law in the U. Kaplan.Y.S. The FAA includes provisions concerning the following: compelling a party to arbitrate. § 202].. Ins.C. 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. C.S. 514 U.. 938. App. Another body of law governing and favoring commercial arbitration in the U.C. which applies to arbitrations arising from transactions that affect interstate or international commerce.S. and modification of arbitral awards [9 U. staying litigation pending arbitration.]. Communications Workers of Am. When one party tries to avoid arbitrating a dispute. v. unless there is “clear and unmistakable” evidence that the parties have agreed to arbitrate arbitrability [First Options of Chi.. see also Progressive Cas. is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) [9 U. Remote Solution Co.A. arbitrators may also be free to eschew fidelity to strict rules of law pursuant to “honorable engagement” clauses. §§ 1 et seq. Reaseguradora Nacional de Venez.S. Travelers Ins. which applies to arbitrations arising from commercial transactions where at least one party is not a U. 1993)]. 398 F. vacatur. Even in the absence of an arbitration provision. CONSIDERING REINSURANCE ARBITRATION.C. many of which are modeled after the Uniform Arbitration Act. The Federal Arbitration Act (“FAA”) [9 U.. the other party may file a motion to compel arbitration (which is in its nature a request for specific performance of the arbitration clause). 2002). courts strongly favor the enforcement of arbitration provisions. Inc. and “enunciates a liberal policy in favor of arbitration” [Argonaut Ins. Co. 208 (2d 40-89 .S.2d 42. v. v. generally apply to disputes that do not affect interstate or international commerce. 991 F. 649 (1986).C. 25 (N.S. the parties to a reinsurance contract may agree after the fact to arbitrate a particular dispute. v.S.

25 (N. Kaplan.3d 24.S. App.. Any controversy. it will not be ordered unless the parties have agreed to arbitrate their dispute [Ace Capital Re: Overseas Ltd v. although most courts seem. Co.Y. the place and time of the arbitration hearing. and enforcement of the arbitration award. The Reinsurance Association of America. There must be “clear and unmistakable” evidence of an agreement to arbitrate [First Options of Chi. v. 307 F. v. 1995)]. Travelers Ins. claim or dispute between the parties arising out 40-90 . Some reinsurance arbitrations are conducted pursuant to procedures set forth by the following organizations: • • • • • • The American Arbitration Organization. and The International Institute for Conflict Prevention and Resolution. controversy or claim arising in connection with the performance or breach of the agreement. the procedures and timeframes to be followed in the arbitral process. v.. Div. might be found to be outside the scope of an arbitration clause governing contractual performance [Argonaut Ins. Central United Life Ins.S. the initiation of the arbitration process. 514 U.22 New Appleman Insurance Practice Guide Cir.3d 20. 938.. Co.40. 67 F. 947 (1995)]. as a practical matter. Co.S.” so certain types of disputes. 2002)]. 2005) (citation omitted)]. The International Chamber of Commerce.2d 24. The arbitration clause in a reinsurance contract typically sets forth the following: the types of disputes subject to arbitration. 27 (2d Cir. Inc.. In addition. 2002)]. Morganton Dyeing & Finishing Corp. the process of selecting the arbitration panel and the qualifications of arbitrators. 29 (2d Cir. Although arbitration is favored by the courts. Arbitrations can be conducted under many different rules and in various fora.Y. to rule in favor of arbitrability or to remand the question of arbitrability to arbitrators — either way referring a particular matter to arbitration. the duty to arbitrate is limited by “the scope of the particular arbitration clause to which the parties have agreed. Inc. the governing law. ARIAS-U. The Insurance and Reinsurance Dispute Resolution Task Force. such as tortious interference or bad faith.. The presumption favoring arbitrability of a particular dispute is strengthened when the language in the arbitration clause defining arbitrable disputes is “broad” [Leadertex. 744 N. 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.

. Corp. 226 (2d Cir. “[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration” [Moses H. Cone Mem’l Hosp. In determining whether a particular dispute is arbitrable. 223 (2d Cir. 246 F. 923 F. Corp. requiring the “federal policy favoring arbitration [to] yield” to the parties’ agreement [Hartford Accident and Indem.. Cross Reference: For an example of a broad arbitration clause in a reinsurance agreement. Co. 2002)].. v. Metallgesellschaft Ltd.. 1.. Mercury Constr. v.Understanding Reinsurance 40. In determining whether a particular claim falls within the scope of an arbitration agreement. Swiss Reinsurance America Corp. Therefore. If the allegations under40-91 . 307 F.45 below. see § 40. 2001) (citation omitted)]. 2001) (citation omitted)..3d 219. 250 (2d Cir.2d 245. 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. Central United Life Ins. Co.3d 24. • • • Any dispute arising from the making. Parties are free to limit by agreement the claims they wish to arbitrate. 1991) (citations omitted)]. 246 F. performance or termination of the contract. if so.S. whether the scope of the agreement encompasses the asserted claims [Hartford Accident and Indem. In contrast. 24-25 (1983)]. v. 29 (2d Cir. v.22 of or relating in any way to the agreement. All claims and disputes of whatever nature arising under the contract. Co. 460 U. Any matter involving the interpretation or application of the agreement. see also Ace Capital Re: Overseas Ltd v. Inc. courts focus on the factual allegations rather than the legal claims asserted. courts typically engage in a two-part inquiry: whether there is an agreement to arbitrate and.3d 219. 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. Threlkeld & Co. An irreconcilable difference of opinion as to the interpretation of the contract. 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. Swiss Reinsurance Am.

N.3d 573. On the one hand. [For a discussion of when courts stay litigation pending arbitration. When a court determines that only some claims are arbitrable.S. 671 N. LEXIS 8542.Y.. Amtower v. Jr. Inc. unless the parties’ agreement provides otherwise.Y. v. aff’d Certain Underwriters at Lloyd’s London. LEXIS 13714 (3d Cir. consolidation may prevent inconsistent and conflicting decisions. Genesco. 583 (Mich. 2006). Inst.. Stolt-Nielsen SA. 2d 200. 815 F. Inc. it must decide whether to stay litigation of the remaining claims pending arbitration or to let them proceed concurrently [JLM Industries. at *4-5 (S.. then those claims are arbitrable [see Mitsubishi Motors Corp.. Roney & Co. 2007 U. 115 (N. 454-56 (4th Cir. Co.. Peabody & Co. 614. 114 F. Shaw’s Supermarkets.. Another issue that most courts have found to be within the purview of the arbitration panel. 473 U. 387 F.3d 251. Benson v.13 (1985). of Tech. Clarendon Nat’l Ins. v.). 1987)]. § 15. 2006). v.S. 581 (7th Cir. Co. 590 N... Co. Supp. 2005) (citation omitted)]. but such review may not be available on an interlocutory basis.. 169 (2d Cir.. of Wausau v. Co.. 254-55 (1st Cir. Ltd. Inc. May 9. whether arbitration under separate contracts can be resolved in a single proceeding [Employers Ins.3d 26. Albert Bedford Walker. Kidder. App.J. 2007)]. 263 F. N. 442 F. see New York Insurance Law. v. 1998). 830 So. Lehman Bros. United Food & Commercial Workers Union. z Strategic Point — Consolidation of Arbitrations: There are potential advantages and disadvantages posed by the consolidation of arbitration proceedings. 29 (2d Cir. v. Inc. Ltd. Co. Absent a contract provision to the contrary. Ct.3d 446. Ct.3d 163. Inc. All Am. questions of mere delay.. App. 2004) (citation omitted). v.22 New Appleman Insurance Practice Guide lying the claims “touch matters” covered by the parties’ contract. 625 n. courts typically stay the non-arbitrable claim.08[2] (Walcott B. Kakiuchi & Co.] If factual questions on which the non-arbitrable claim turns may be resolved in the arbitration. 321 F.2d 114.40.S. Co. 1997). Courts can sever arbitrable claims from nonarbitrable claims. v. 739 (Ala. Inc. 2d 736. 2001)]. Westchester Fire Ins. provide arbitrators with a more complete understanding of the issues involved in the disputes and 40-92 .2d 840 (2d Cir.W. 2002). 1998)].Y. Inc. v. 203-05 (D.. Appellate courts review decisions to compel arbitration de novo [Sphere Drake Ins. 443 F. Sup. Century Indem. Termite & Pest Control. 2003).N.2d 580. Dist.D. ed. Dunham. that is. laches and untimeliness raised to defeat arbitration are generally issues of procedural arbitrability reserved for resolution by the arbitrator [Glass v. v. Markel Int’l Ins. William C. Soler ChryslerPlymouth Inc. is whether or not arbitrable disputes can be consolidated. but see In the Manner of Donaldson Acoustics. 2005 U.Y. Westchester Fire Ins.S..

McCarthy. Shore Pipe Line Co.. Thus. It also may be difficult to restructure an arbitration proceeding to accommodate the rights of additional parties or related disputes. by assuming that the parties did not intend to eviscerate the arbitration clause through the service of suit clause [see Montauk Oil Transp. 204 (N. Shore Pipe Line Co. 298 (2d Cir. Parties seeking consolidation should approach their arbitration panel quickly to ensure that the decision regarding consolidation will be made by the panel they chose. Underwriting Ass’n (Bermuda). Corp. 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. Servs. Supp. courts have been reluctant to find that an arbitrator exceeded his authority in ordering relief. 44 F.S. Servs. Unigard Sec. Ill.. Co. v. 79 F. The arbitration clause is also the starting point for a determination of the remedies that can be imposed by an arbitral panel. 1990)]. Ins. 200.. consolidation may be more costly for a party only peripherally involved in a series of complex disputes. Oct.2d 6. On the other hand. Inc.D.D. Most courts have harmonized these clauses. Steamship Mut. 200. at *7 (N. La.Understanding Reinsurance 40. LEXIS 15848. Dist. Aug. 1996). Consistent with the federal policy favoring arbitration. 1998 U. however. Rhone-Poulenc. Ochsner/Sisters of Charity Health Plan. 791 F. 6. Mut. v. and not a panel adjudicating another dispute. Courts have found that the service of suit clause is intended to provide jurisdiction over a foreign party. Inc.D. 831 (9th Cir. Co. Cal. including equitable remedies such as pre-judgment attachment or security. 10-11 (1st Cir.. 1992)]. v. London. Ins.3d 826. v. LEXIS 12561. where the arbitration agreement does not specifically restrict the arbitrator’s authority [Mich. Associated Elec & Gas Ins. “[S]ubject to the terms of the empowering clause. Certain Underwriters at Lloyd’s. Ltd. v. and where it co-exists with an arbitration clause.. 1996 U. Inc. 1992)]... Ill. 204 (N. 791 F. & Gas Ins. 30. 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. arbitrators possess latitude in crafting remedies as wide as that which they possess in deciding cases” [Advest. under a broadly worded arbitration 40-93 . Some parties have argued that inclusion of a service of suit clause in a reinsurance agreement conflicts with an arbitration clause in the same agreement and indicates that the parties did not intend all issues to be arbitrable.D. at *5-7 (E. v. v. Supp. 1998)]. W. 1995). For example. Ltd. Associated Elec.22 promote more efficient and cost-effective dispute resolution. may create a risk that the panel’s decision will be tainted by facts irrelevant to a particular dispute and may raise additional confidentiality concerns. 1996). Gould Elecs. Dist. Inc.3d 295. 914 F.S.

. British Ins. at *13-14 (S. Zimmerman. 1990)]. 832-33 (9th Cir. 2004)]. 853. v.. Corp. the power to grant relief may not be limited by the scope of the parties’ agreement. Gen. Miss. 1026 (9th Cir. Co. 2004 U. 195 (2d Cir. Dist. Ins.N. at *7-8 (N. 220 F. Inc. 93 F.S. Ins.S. 839. In some circumstances.2d 836. Ins. 1022-23. Co. Reinsurance Mgmt. v. Co. 1064 (N. Norad Reinsurance Co. Co. 1989)]. 26.D. The attempted inclusion of non-signatories to the arbitration agreement in an arbitration proceeding is frequently a subject of dispute. Unigard Sec. 1183 (10th Cir.J. Bldg. Conn. 1992]. Flakt. 2002)].. 2000)]. Co..2d 52. Life Ins. 1061. 868 F. 783 F. arbitrators are empowered to reform a contract [Mut. Water St.. agency and estoppel [see Hughes Masonry Co.D.D. Greater Clark County Sch. non-signatories to an arbitration agreement may be bound to arbitrate pursuant to several legal doctrines. v. Ohio Reinsurance Corp. 44 F..3d 826. Inc. including: assumption. v. of N.Y. Inc. 931 F. 33 (2d Cir. Fire.. Co. v. v. Dist. non-signatories to an arbitration agreement generally may not be bound to.40. 1997).. Fire. but see Recyclers Ins. 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.3d 24.. However. 1995)]. Marine & Inland Ins.3d 1180. Supp. Interstate/Johnson Lane Corp. Life Ins. Co. J. 731 F. v. Co.D. v. Mut. Supp.S. 868 F. Supp.A. Co. 516 (S. 56 (3d Cir. 1992)]. Benefit Life Ins. Cont’l Cas. 32 (1991).. Natural Petroleum Charterers. Co. In addition. 1989). Co.. 1991).D. Central United Life Ins. Mut. Am. Group v. 2d 506. of Cayman v. Brown v. 957 F. Because arbitration is a contractual right.S. Gulf Guar. v. Co.N.. if the background rules governing the arbitration provide broad equity powers [see Gilmer v. v. 1991). 1998 U. Certain Underwriters at Lloyd’s London. Norad Reinsurance Co.. 500 U. v. 865-67 (D. 1992 U. 935 F. 56 (3d Cir.D. LEXIS 15848. v.2d 1019.N. 307 F. 1998). 20. agency. 1981). a non-signatory may force a signatory to an arbitration agreement to submit to an arbitration with the non-signatory under principles of contract. 838-41 (7th Cir. Cal. Inc.2d 52. 2000).. Further. Coleman Co.2d 191.. Mich. Gould Elecs. veil piercing. v. enforce an agreement to arbitrate [Mut. Inc. 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. arbitrators can award temporary equitable relief where necessary to ensure that the final award is meaningful [Pac. and incorporation by reference [Int’l Paper Co. Marine & Inland Ins. Co. Dist. Arbitrators also generally are empowered to award prejudgment interest [Rhone-Poulenc. LEXIS 4060. 841-42 (S. estoppel. Jones Constr. in certain circumstances. Assuming the arbitration clause is broad enough. Supp. Pa. LEXIS 8731.22 New Appleman Insurance Practice Guide clause. at *14 (E. Ga. 659 F.. Ins. Schwabedissen Maschinen & Anlagen 40-94 .Y. nor able to. Corp.

1. Cebcor Serv. 2003) (applying Pennsylvania law).22 GMBH. 2000).D. 26. Star Nat’l Ins. Example: A reinsurer sued to rescind a reinsurance contract based on non-disclosures in the underwriting process. at *6-11 (N. 2003).. Dist. 943 F.. 2003 U. Vol.3d 218. & Cas.S. 289 F.2d 411.S. 776 (2d Cir. Guarantee Trust Life Ins. Dists. United Life Ins. Ill. . LEXIS 22777. 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.3d 434. 1995). If a party waits while a matter is being litigated to assert a right to arbitrate. 1997)]. Sch.3d 201. Co. Co. Kramer v. Am. Co. Inc. The right to arbitrate a dispute may be waived if a party fails to comply with the terms of the arbitration agreement. LEXIS 10346. v. Co. . v. v. App. at *11-12 (S.2d 176. 221-22 (1st Cir. Int’l Group. reported in Mealey’s Litigation Reports: Reinsurance. 1997).. 179-80 (2d Cir.D. v. at *7-8 (N. 106 F. 2003 U. 438 (6th Cir.3d 773.A. Dist. Administratia Asigurarilor De Stat.Understanding Reinsurance 40. 416-18 (4th Cir.D. Ins. of Denver Mar. Aug.. LEXIS 14463. LEXIS 15571.. Am. Example: A narrow arbitration clause applying only to “irreconcilable differences of opinion” that concern “the interpretation” of facultative certificates did not encompass a claim that the certificates were void ab initio because of the cedent’s failure to disclose asbestos litigation [Gerling Global Reinsurance Co. Arbitration Ass’n. Dist. 204-05 (7th Cir. Colo. Ins. 1991)]. Ill. Corp. Self-Insurance Pool. 72 F.S. v. 64 F. 2002 U. 24 at D]. INX Reinsurance Corp. Co. No. 2002). 3.. Ace Prop. Iowa 2004)]. v. No. excessively delays commencing arbitration or takes action that is inconsistent with the arbitral process [see Gen. v. 2003 U. Ins. Hammond. 18. Dec. but see Frank B. Hall Co. Example: Under an arbitration clause providing that “any dispute or difference of opinion hereafter arising with respect to this Contract . v. 92 CV 225 (Colo. Ct. 206 F. 1995).S. 40-95 . Menorah Ins. 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. of Colo. at *5-7 (2d Cir. the court may find it to be estopped from asserting the arbitration clause if the litigation has proceeded substantially. Thomson-CSF. Co. Co. Am. 2002) (unpublished opinion)]. but see Grundstad v. Ritt. City and Co. Dist. S.

2[F]. try this source: Reinsurance Law. Revios Reinsurance U. Jr. Eric Mills Holmes. 2004)].. citing Mo.23 Neutral Panel or Party Advocate System.). Ins. 1996). Arbitration agreements typically include provisions stipulating the number of arbitrators and their qualifications. Certain Underwriters at Lloyd’s of London. Dist.N. Cross References: For discussions of whether an insolvent company’s liquidator or receiver is bound by an agreement to arbitrate.D.N. Lan.S. 2002)].350 (as then existing)]. Rev. ed. Ill. LLC v. 519-521 (S. 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 reinsurer’s obligations under those agreements. 152 F. Stat. A reinsured party not specifically named in an excess of loss reinsurance agreement was permitted to compel arbitration against the signatory reinsurer under the agreement’s arbitration clause as a third-party beneficiary of the agreement [Cont’l Cas. Mo. Dist. LEXIS 4060. 2002 U. § 435. Appleman on Insurance 2d § 107.Y.Y. at *5-8 (W. Co. Ill. Co. at *6-7 (N.. 2004 U.D. Agency Services. see New York Insurance Law § 15.D. of Conn.08[4] (Walcott B. The court found that the intermediary was estopped from refusing to arbitration because of its allegations that it suffered harm due to the reinsurer’s repudiation of the contracts and because the intermediary received a direct benefit from the agreements [Int’l Ins. LEXIS 7923. Co. Lexis. Using the Table of Contents.com Search: To find a general discussion of arbitration in the reinsurance law context. 40. Dist. 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. Dist. Fire & Cas.S. v. LEXIS 22710.S. Supp. v. the timing and method by which the panel is to be 40-96 .D. v.D. Co. at *14-19 (N. v.. Dunham.. 2d 506. Inc. LEXIS 22229. 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 Nat’l Ins. Co. navigate to Chapter 6 Arbitration.” the issue of a mutually agreeable location for the underlying dispute is arbitrable [Trustmark Ins. 2001)]. at *13-14 (S. 2007)]. 1996 U.S. 2007 U.40.S.23 New Appleman Insurance Practice Guide shall be submitted to arbitration. Certain Underwriters at Lloyd’s London.

v.2d 1470. 1991)].Understanding Reinsurance 40. parties request the organization administering the arbitration to appoint the umpire. 1472 (11th Cir. however. neutral umpire) cannot agree on umpire selection. Reinsurance arbitration agreements typically provide that each side is to designate its own “party” arbitrator. 892 (D. 1994). Conn. Leatherby Ins. usually set forth objective qualifications for arbitrators and umpires..2d 673. Co. 814 F.. Group v. Dist. the tribunal is usually composed of three arbitrators.” 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. 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. 1327-29 (9th Cir. Reinsurance Corp. Reinsurance Mgmt. Plan of Greater N. Astoria Med.S. In some instances.D.3d 125. v.. party-appointed arbitrators may be nonneutral and predisposed towards the party that appointed them.C. Although party-appointed arbitrators may have a general predisposition or sympathy with a party or its position. Co. 129 n. Unless set forth in the contract. AIG Global Trade and Political Risk Ins. or if the parties “fail to avail” themselves of the procedures agreed upon for selecting arbitrators. v. Co. & Cas. and then the two designated “party” arbitrators are to appoint a third “neutral” arbitrator. J.2d 1324..N. but instead incorporate the rules of an arbitration organization containing such procedures. 2006 U.S.. § 5. 885. umpires are expected to remain 40-97 . v. 182 N.E.. v.23 selected and whether one arbitrator is to act as an umpire or chairman of the panel. Md. Co. 2006)].2 (7th Cir. Health Ins. 1987). 1988). Co. Allstate Ins. this is more in the nature of a duty to give the party appointing them a fair hearing. unless the parties or the contract specifies otherwise [Lozano v. 780 F.Y. 850 F. party-appointed arbitrators are not surrogates for the party and still must make independent judgments and act fairly [Universal Reinsurance Corp. the arbitrators need not meet any particular requirements beyond capably performing their task.) In contrast. Metro. Co. Cas. In arbitrations conducted pursuant to reinsurance agreements. Ins. 1983). Ins. 679 (7th Cir. 87-89 (N. LEXIS 73258. at *15-17 (S. 16 F. Penney Cas. 714 F. 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. Co. If the agreement is completely silent on the method for selecting arbitrators. In the United States. usually called an “umpire.Y.Y. Odyssey Am.. (There also may be more latitude in discussing the merits of the dispute with a party-appointed arbitrator until the umpire is selected. see also Pac. Supp. Arbitration clauses in reinsurance agreements.C.2d 85. 1962)]. Prop. Merit Ins. Some agreements do not specifically list these procedures. Corp. Ohio Reinsurance Corp.

40.23

New Appleman Insurance Practice Guide

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. Cont’l Cas. Co., 393 U.S. 145, 147-49 (1968); see also U.S. Wrestling Fed’n v. Wrestling Div. of AAU, Inc., 605 F.2d 313, 319 (7th Cir. 1979)]. Failure to disclose business or financial 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. Nat’l 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 arbitrator’s qualifications 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 disqualified 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 Mealey’s Litig. Report: Reinsurance, Vol. 10, No. 21 (Mar. 9, 2000) at C-1; Evanston Ins. Co. v. Kansa Gen. Int’l Ins. Co., Ltd., No. 94 C 4957 (N.D. Ill. Oct. 17, 1994), reported in Mealey’s 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 specified 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 specified 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

Understanding Reinsurance

40.23

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 find that a party making an untimely selection forfeited its appointment right, unless the parties expressly made time of the essence in the contract’s 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 certificate, 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 qualified individuals from which parties can select arbitrators. For example, ARIAS-U.S. publishes a list of certified 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 influence 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

40-99

40.24

New Appleman Insurance Practice Guide

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 reflects 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 find a resolution that best reflects 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 finding 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 Lloyd’s 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 reflects that the qualifications clause in the arbitration 40-100

2005 U. v. 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. apply industry custom and practice as well as equitable principles to reach their decisions. LEXIS 7348. The nature and extent of discovery available in reinsurance arbitrations varies widely.Y. Some arbiters will allow discovery only on the specific claims and reinsurance contracts at issue in the arbitration. Although arbitration clauses often do not address the arbitrators’ author40-101 . App.Understanding Reinsurance 40. Allstate Ins. Pa.N. Certain Underwriters at Lloyd’s London. 1994)]. 1996). Dist. for a discussion of the rare circumstances under which arbitral awards may be vacated under the “manifest disregard of the law” standard. arbitrations are not obligated to issue a reasoned decision explaining the award.A.2d 420.S. v. Co.8 (Wis. of Wausau v. Nat’l Ins. 1996 U. App.N.. Co.” including ordering a party to post additional pre-hearing security [Meadows Indem. Comm’r of the State of Cal. some arbiters will allow depositions.. Ltd.25 Discovery in Arbitration. Life Ins. while others essentially will permit the parties to request any documents they wish. 2005) (unpublished decision).27 below]. 123. depending upon the nature of the case.D. 2000 U.28 below]. unless the parties so agree or the panel so orders. Unless the contract provides otherwise. Ins.W. they may. 552 N. Co.25 agreement often does not require that the arbitrators be trained in the law [see U. however..D. Co.D. v. while others will not (especially from third parties). and often do. 40. Nw.S. v.S. Co. Ct. 866 F. Employers Ins. S. at *7-8 (9th Cir. 2000).. The broad and liberal rules governing pretrial discovery in state and federal civil cases generally do not apply in arbitrations. Document discovery is almost universally permitted in arbitration. at *4 (S.S. 129 (S. [For a discussion of reasoned awards in reinsurance arbitrations. 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. River Ins. see § 40.. 1996)]. LEXIS 14318. Ins. see § 40. arbitrators in U. Dist. Compania De Seguros. the arbiters’ views on the issue.Y. LEXIS 25763. the amount of document discovery can differ significantly.S. Co. Arkwright Mut. Supp. at *12-13 (E. Generali Mex. 427 n. In addition. and the particular rules governing the arbitration. Instead.

case law is split as to whether arbitrators have the authority to order pre-hearing discovery of non-parties.3d 567. E...Y.Y. Application of Deiulemar Compagnia Di Navigazione S. The FAA does not. Nat’l Science Found. 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.3d 473. 870-71 (8th Cir. M/V Allegra. 2004)]. J. 198 F. In re Arbitration between Douglas Brazell v.3d 269. v. Supp.N. however.3d 404. In one case.S. Some courts have approved pre-hearing subpoenas for production of 40-102 . arbitrators have broad power to issue subpoenas and subpoenas duces tecum. Inc. Dist.. LEXIS 4482. 348 F. Life Ins. 577 (2d Cir. In contrast. Supp. 2005).S. These disputes typically are resolved by means of letter briefs to the panel or a conference call with the umpire. 880 (N. quoting Odfjell ASA v. Celanese AG.. v. pre-hearing discovery of non-parties is prohibited unless a party demonstrates a “special need” [see Comsat Corp. Ltd. particulary pre-hearing deposition discovery. at *4-9 (S. 407 (3d Cir.40.C. 1999)].D. see also Hay Group v.N. Under Section 7 of the Federal Arbitration Act (“FAA”) [9 U. E. of Delaware County. Occasionally. Acquisition Corp. 413-14 (3d Cir. 2004) (Chertoff.D. if the evidence sought for the hearing is material to the proceedings. and the laws of most states.S. it is commonly recognized that arbitrators have the authority to resolve procedural disputes. Kidney Ctr. Am. the Eighth Circuit Court of Appeals and several federal district courts have held that implicit in an arbitration panel’s 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. 1995)]..B.25 New Appleman Insurance Practice Guide ity to resolve discovery disputes.3d 404. 2000). 274-76 (4th Cir. the court approved a “special purpose hearing” for non-parties to respond to arbitral subpoenas. 430 F. 2000 U.D. 2004). As a result. Co.3d 865. 190 F. Ill. including the scope and nature of permissible discovery. the panel will hold a hearing with counsel to resolve a discovery dispute. the parties often raise privilege and other production disputes during the discovery process. Celanese AG. 360 F. 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 final hearing” [Stolt-Nielsen SA v. 360 F.A. specifically address the arbitrators’ power to require non-parties to submit to prehearing discovery. § 7].. v. 879 F. Color Graphics. v. Acquisition Corp.. 878. Inc. 1999). of Am. 287 (S. 480-81 (4th Cir. As can be expected. The Fourth Circuit Court of Appeals has held that arbitrators’ powers should be limited to those specifically set forth in the FAA.P. Amgen Inc.S.B. 2000). therefore. concurring)]. 2d 283. 228 F.

In re Arbitration between Douglas Brazell v. at *9.” published by the International Institute for Conflict Prevention & Resolution. Insurance and Reinsurance Disputes” published by the Insurance and Reinsurance Dispute Resolution Task Force [see Procedures at www. Practical Guide at www. includes discovery procedures in its “Practical Guide to Reinsurance Arbitration Procedure” [see ARIASU. 157 F. 228 F. 1994)]. Jan.3d at 871..S. Inc.arbitrationtaskforce. “The CPR International Reinsurance Industry Dispute Resolution Protocol. 02-4304.N. 2004).arias-us. Centennial Ins.D.Y.D. Fla. Co. 2000 U.25 documents.S.N. Atmel Corp. 1988)].D. 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.S.D. Ltd. Other courts have acknowledged broad arbitral power to order both documentary and testimonial discovery of nonparties before a final hearing.R. Inc. The intermediary can be made a party to the reinsurance 40-103 . includes procedures for the parties’ exchange of information [see Protocol at www. v. 371 F. 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. Dist. Supp. Meadows Indemnity Co. Minn. 885 F.org]. Integrity Ins. LEXIS 4482. Co. 2d 402. Life Ins. No. 69. 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. it is unclear whether a pre-hearing arbitral subpoena issued to a non-party will be enforced by a court. Supp. Inc..org]. 71 (S. 2004 U. In addition. Color Graphics. 45 (M.org]. at *7 (D. 1242-43 (S. for example.Y. 9.. Supp. AB. 685 F.. a result that can be justified especially where such discovery may facilitate speedier resolution of the principal dispute [see Stanton v. ARIAS-U. Nutmeg Ins. Tenn. 403-04 (S.S. Discovery also is included in the “Procedures for the Resolution of U. 1995)]. v. Dist. Inc. Am.S.Understanding Reinsurance 40. of Am. Reinsurance intermediaries are typically not parties to arbitrations between ceding insurers and reinsurers but often possess critical information relevant to reinsurance agreements. 2005). Co.insurancemediation. Xcel Energy.. 42. 1241. v. Am.D.. but not for depositions [see SchlumbergerSema.. v. Paine Webber Jackson & Curtis. LM Ericsson Telefon. z Strategic Point: Given the conflicting case law interpreting arbitra- tors’ subpoena power under Section 7 of the FAA. Co. LEXIS 389.

Consider: Nevertheless. dismissed a petition to enforce a subpoena that had been issued by an arbitration panel to a non-party [Liberty Mut. 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. intermediaries may resist such approaches. L. 3. at the time of a dispute. Vol. Ins. Of course.. There is ample authority supporting an arbitration panel’s granting of a motion for summary disposition without live testimony or a full evidentiary hearing. both parties to the reinsurance contract may wish to have access to the intermediary’s documents and witnesses.] for an arbitrator to respond to a dispositive motion. Reinsurance. The intermediary can be made a party only to the intermediary and arbitration clauses of the reinsurance agreement (in either case. if the evidence omitted is not legally relevant or is cumulative. Bus. both of which counsel that the parties may be able to reach a practical accommodation of the intermediary’s interest (including perhaps agreeing to defray part of the intermediary’s cost of compliance).01. 06-11901 (D. Mass. 22 (Mar.. 2003). No. 2007). following the Third Circuit’s decision in Hay Group Inc. Group Ltd. there appears to be a growing understanding that such motions should be granted in arbitrations where the facts and circumstances so warrant. § 1. reprinted in Mealey’s Litig. the federal District Court for the District of Massachusetts.A.26 Summary Disposition in Arbitration. the arbitration clause could provide that the intermediary submit to pre-hearing discovery in disputes arising out of the agreement). Sec. White Mountains Ins. “An Attorney’s Guide to Alternative Dispute Resolution (ADR): ’ADR 1. 2. Rep. 22. and either or both may have ongoing commercial relations with the intermediary. reinsurer and intermediary.C. 40. v. 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. As a practical matter. Dispositive motions have tradi- tionally been granted sparingly in reinsurance arbitrations. 2007) at 4].26 New Appleman Insurance Practice Guide contract. et seq. 8 (Jan.S. Co.”’ 1 A. Although there is no express statutory authority under the Federal Arbitration Act (“FAA”) [9 U.40. No. however. 40-104 . making it a three-way agreement among the cedent. Trantina. 17.B.

Mass.C. Computer Distrib.pdf. 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. however. Dist. Inc. Communications Workers of Am. Corp. 201-02 (3d Cir.3d 988.23 above]. speedy and cost-effective resolution” of the cases [American Arbitration Ass’n. Procedures for the Resolution of U. Local 13000.. for a discussion of arbitrators’ freedom to dispense with judicial formalities and determine arbitration procedures.S.org/buslaw/newsletter/0008/adr/ adr101. 557 (1964)].3d 197. Insurance and Reinsurance Disputes issued by the Insurance and Reinsurance Dispute Resolution Task Force also specifically authorize consideration of summary disposition motions by reinsurance arbitration panels [Reinsurance Ass’n of America. The revised Uniform Arbitration Act (the “UAA”) expressly permits arbitrators to decide a request for summary disposition based solely on documentation. 1989 U. available at http://www. Sabre Constr. In addition. 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. Consistent with the goals of speed and efficiency in arbitration.1 (2004)]. v. Aug. in accordance with their terms. The AAA Procedures for Large. 164 F.D. v. and parties may stipulate by contract the rules under which their arbitration will be 40-105 . by arbitration agreements that expressly limit such authority. after a party submitting the request gives notice and opposing parties have a reasonable time to respond [see UAA § 15(b) (2000). Procedures for Large. 632 F.S.26 available at http://www. like other contracts. 1999). 557-58 (D..nccusl. Inc.. 10. The Procedures for the Resolution of U. Commercial Arbitration Rules and Mediation Procedures R-30(b) (2005). see § 40.. Supp. 187 F.org]. v. Unless otherwise restricted. Parties may agree upon appropriate procedures by contract. 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 FAA requires courts to enforce privately negotiated agreements to arbitrate. Insurance and Reinsurance Disputes § 13. at *12-13 (D. Corp. 995 (8th Cir. v. Inc. 543. Cearfoss Constr. Livingston. American Arbitration Ass’n. Inc. 1989)]. Zinsmeyer Trusts P’ship. Raytheon Co. 553.S. Complex Commercial Disputes L-4(a) (2005)]. v. 1999). arbitrators are encouraged to take appropriate action to simplify and expedite proceedings [see PaineWebber Group.abanet. 376 U. LEXIS 9639.Understanding Reinsurance 40. 1986). but where they do not. see also John Wiley & Sons. arbitrators have wide discretion to decide procedural matters and determine the meaning of procedural rules [see Bell AtlanticPennsylvania.S.

Sys.. Pegasus Constr.Y. 52. the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and state arbitration acts. 232 F. Inc. v. 40-106 . 1999). 58 F.2d 1200. Inc. Corp. 929 P. there are very limited grounds for courts to vacate arbitral awards under the FAA. Petrojam. e. Supp. App. 28 F. Vermonty. Co. v. Co. Jeffries & Co. 709 (7th Cir. 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. The authority of arbitrators to decide motions for summary disposition is usually litigated in court proceedings to vacate or confirm the award. Inc.2d 258.28 below].3d 383. Prudential Sec.2d 833. v.. Alternatively. 1996)]. Supp. Supp. 2001). Co. Air Fla. 1201-03 (Wash. 2007). 1997)]. 929 F. Dalton. 219-21 (S. v. 387-90 (4th Cir.. a contract provision prohibiting summary adjudication in the arbitration proceeding most likely precludes such action. 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 Int’l Union. 1987). 822 F. Ltd. 958 F. 1999)]. ConAgra Poultry Co. Baravati v. at *19-20 (8th Cir. 2000). Inc. 252 (S. Sheldon v. Turner Constr. 1417-18 (N. United Mine Workers of Am. 2007 U. Co. Employers Ins. but see British Ins..3d 704.Y. Josephthal. In the cases confirming summary decisions. 1994)]. 514 U..D.. Generally. 1992)]. LEXIS 7681. see § 40. Arbitrators generally are required to follow any procedures set forth in the parties’ agreement [W.D.D.S.. v.26 New Appleman Insurance Practice Guide conducted [see Mastrobuono v. Marrowbone Dev.g. Fed. Barnes. 1207 (10th Cir. 1411. 842-43 (9th Cir. Deposit Ins. 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. Therefore. Corp. 2d 248. Griffen Indus.. [For a discussion of the circumstances under which courts vacate arbitral awards. 262 (9th Cir. Okla. 37 F. 57 (1995)..N. 269 F. Challenges to an arbitration panel’s decision to grant a motion for summary disposition typically fall into two categories.N. Vacatur will not be granted simply because the court might have come to a different result. Shearson Lehman Hutton.S. 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. App.. Employees’ Profit Sharing Plan v.3d 1202.40. 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. 2d 212. v. Lyon & Ross. Ct. Co.

D. 2004)].. the court did not specifically address whether or not the panel had the authority to decide the matter by ruling on the motion for judgment on the pleadings. All Am.” exceeded its authority by deciding a legal issue reserved for the courts and a factual issue not before it. Examples: Courts have confirmed summary awards in arbitral pro- ceedings despite the absence of explicit authorization for the procedure in the governing rules or statutes [see Melchers v. or of the entire dispute. Turner Constr. Co.27 Reasoned Awards. App. Reinsurance arbitration panels typically issue a signed written decision articulating the award..Understanding Reinsurance 40. at *8-10 (N. Example: A federal district court confirmed an arbitration panel’s summary award where a party.S. and exhibited a manifest disregard for the law by misinterpreting state contract law [id. In the United States.2d 1200. 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. an 40-107 .D. LEXIS 18049.]. a written dissent also may be issued. App. (“All American”). at *19-26 (E. If the decision is not unanimous. 1104 (1995)]. 40.Y. 929 P.S. 2006 U.. 93 F. Tenn. 517-19 (S. LLC. All American Life Insurance Co. Co. In affirming the panel’s award. However. Co. the court’s opinion clearly assumes that the panel had this power and rejects each of All American’s purported grounds for vacatur [id. Water St. Ill. at *33-42]. Pegasus Constr. All American argued that it had been denied a fundamentally fair hearing because the panel gave undue weight to the alleged “admission.. Ct. Corp.D. therefore the contracts were not valid [Sphere Drake Ins. 2d 506. Ltd. 40 Cal. z Strategic Point: Dispositive motions can streamline the arbitral process by eliminating specious claims and defenses. Corbin Assocs. 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. Schlessinger v. v. 2006). 1997). In a motion to vacate the award. 2000)]. 1203 (Wash. 2004 U. Supp. Rosenfeld. 4th 1096. LEXIS 3494.27 of Cayman v. Dist. Ins.N. Life Ins. Dist. Although arbitrators are sometimes wary of the practice and courts will carefully scrutinize summary rulings. Meyer & Susman. v. “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.

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.A. many arbitral decisions are presented in a brief statement outlining the nature of the dispute.]. Thus. it is probably a good practice for the prevailing party to have the award confirmed even if the losing party intends to comply with the award. that also is one virtue of the process. After a reinsurance arbitration panel renders its award. Note also that the absence of reasoned awards.2d 551. especially when honorable engagement clauses apply.. or both. 554 (2d Cir.40. 751 F.28 New Appleman Insurance Practice Guide arbitration panel need not set forth the rationale supporting its award. An arbitration award will be summarily confirmed upon motion by a party. however. v. 516 (2d Cir. Consider: If the arbitration agreement does not specify a confirmation court. § 9]. Inc. z Strategic Point: On balance. require the reinsurance arbitration panel to explain the reasoning for an award as a pre-requisite for being appointed to the panel. Waltman. Stock Exch. unless the parties’ arbitration agreement requires it to do so [N. S. 40.. absent grounds for vacatur. Transocean Gulf Oil Co.].C.S. modification or correction [id. s Timing: If the arbitration agreement specifies a particular court for confirmation. 935 F. The parties may. but it allows the prevailing party to have an executable judgment. Arbitration between Fahnestock & Co. the prevailing party may submit a motion in court to confirm the award or the losing party may move to have the award vacated. z Strategic Point: Although arbitration is sometimes derided as un- duly allowing arbitrators to reach compromise awards. may increase differences in outcomes from one arbitration to the next. A confirmation action need not be contentious. application for confirmation “may be made to the United States court in and for the district within which [the] award was made” [id. v. the party seeking to confirm the award may request a confirmation order from the specified court any time within one year of the award [9 U. It 40-108 . 1985)].2d 512.28 Know When to Move to Vacate or Affirm Arbitration Award. stating the prevailing party and describing any relief awarded. so parties should consider their philosophical tolerance for one approach or the other when drafting an arbitration clause.Y. 1991). 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. Koch Oil.

While decades ago courts were more receptive to challenges to arbitration awards. The grounds upon which an arbitration award can be vacated are extremely narrow under the Federal Arbitration Act (“FAA”) [9 U. China Nat’l Mach. Under Section 10 of the FAA.D. at *3-4 (S. Co. Tenn. Ltd. 304 (S.D.S. The district courts are not to function as an appellate forum to second-guess what happened in the arbitration. Supp. Ins. Although there is disagreement among courts as to precisely what an arbitrator must disclose to avoid a claim of “evident partiality.Y. Fraud typically requires a showing of bad faith and may be evidenced by bribery or by willful destruction or withholding of evidence [id.C. 659 F. fraud. § 10(a)(2)]. 728 (W.. (2) materially related to an issue in the arbitration.N. Indocomex Fibres Pte. The following are the specific statutory circumstances justifying vacatur of an arbitral award: • “Where the award was procured by corruption. The “[e]xceptions to confirmation 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. 721. Ltd. Supp.28 should be noted that moving to confirm 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”). LEXIS 19516. § 10(a)(1)]. 1351 (S.N. awards typically are vacated only where arbitrators exhibited bias or procedural unfairness (as opposed to procedural error). Cotton Co.C. 1996)]. Co. and (3) established by clear and convincing evidence [Houston Gen. 1997)].S.Understanding Reinsurance 40. and the standard of review they apply is much narrower than the federal appellate courts apply to decisions of the district courts. 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.. Certain Underwriters at Lloyd’s London.C. although moving to confirm or vacate under the New York Convention does provide an independent fount of jurisdiction in the appropriate court. 1987)].D. 1346.S. Dist. 2003 U.. Int’l. v. 978 F. Trenwick Reinsurance Co.Y. or either of them” [9 U. that is not true today.” courts typically look for a real and direct financial interest in the result of the arbitration or a 40-109 • .S. Tex. 2003). v. 916 F. “Where there was evident partiality or corruption in the arbitrators. Inc. v.D.. 266. Import & Export Corp. § 10].. or undue means” [9 U. state statutes and the New York Convention. Supp. v. Trans Chem.

or in refusing to hear evidence pertinent and material to the controversy.. Home Ins.3d 621.40.S. v. upon sufficient cause shown. Co. Robbins v. 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.. 1523 n. 954 F. v.24..3d 1503. 2007). or of any other misbehavior by which the rights of any party have been prejudiced” [9 U. • “Where the arbitrators were guilty of misconduct in refusing to postpone the hearing. 120 F. Cont’l Cas. 1994)].3d 843. 1994). Jnesco.2d 679. 40.S. see §§ 40. Bertek. v. ADM Investor Servs. Hobet Mining. 278 F.. 995 (8th Cir. 19 F. v. UBS Painewebber. Cont’l Cas. Dist. Conn. Ctr.26 above].. 1997)]. The 40-110 • . Arbitrators are accorded wide latitude in conducting hearings and are not constrained by formal rules of procedure or evidence [Robbins v. Therefore. for discussions of arbitrators’ broad powers to conduct proceedings. Ltd. New Century Mortgage Corp.. 486-87 (D. 476 F. final and definite award upon the subject matter submitted was not made” [9 U. W. Co. 1312-13 (11th Cir. They may simplify and expedite proceedings. First Options of Chi.28 New Appleman Insurance Practice Guide direct business relationship with one of the parties that calls into question his or her neutrality [see Commonwealth Coatings Corp. Inc. 685 (11th Cir. United Mine Workers. Inc. #15 v.C. Vigorito v. Inc. 477 F..S.3d 988. 393 U. 1021 (S. Co. 20 (2d Cir. 2007 U. 2002). LEXIS 25458. 1992)]. or so imperfectly executed them that a mutual. 146-48 (1968). § 10(a)(3)]. and not merely speculative. Day.25 and 40. Inc. 286 (5th Cir. 247 F. 621-23 (7th Cir. Life Ins.. Inc. Int’l Union. 187 F. Nondisclosure sufficient to vacate an award usually creates a concrete. Lourdes Med. Supp. Tempo Shain Corp. 847-48 (8th Cir. v. Nationwide Mut.C. 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 arbitrator’s having acted in a partial manner) [Kaplan v.. 1991). 685 (11th Cir. 307 F. Zinsmeyer Trusts P’ship. 2007)]. Dist. Sphere Drake Ins. Ins.J. 2001). impression of bias [see Positive Software Solutions. Day. Inc. 1998)].2d 679. Va.D. Supp. § 10(a)(4)]. v.3d 278. Co. at *24-25 (D. 626 (6th Cir.S. and they are not bound to hear all of the evidence tendered by the parties [PaineWebber Group. 2007). 146 F.N. 1999). 877 F. 954 F. Co. All Am... 2d 481.3d 1309. “Where the arbitrators exceeded their powers. 2002). of Burlington County v. 145. v. Gianelli Money Purchase Plan and Trust v.3d 16. Inc.30 (3d Cir. (citations omitted). 1011.3d 617.

239 F. 2d 812. 2002). 816 (N. The “manifest disregard of the law” standard has not been applied so as to vacate a reinsurance arbitration award in any reported court decision. Certain Underwriters at Lloyd’s v. “The error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator” [id. The burden of proof rests on the party seeking to vacate an arbitral award [Transit Cas. 1987)].Y. Lyon & Ross. Supp. especially concerning relationships between employers and employees. 44 F. Inc. Co. health care providers and their members.2d 131. Josephthal. 2003)].3d 826. v.2d 930. v.N. Co. 933 (2d Cir.S. Co. or the parties’ submissions to the panel. 287 N. 135 (Wis.. 954 F. Unigard Sec. Inc. 1351 (S.. v. Ass’n. & Smith. Co. LEXIS 9861. 2007)]. Mut.3d 645.. Dist. Royal Alliance Assocs. v. 266 F. v. Ill. Milwaukee Bd. Ltd. at *3-4 (S. 706 (7th Cir. Co. BCS Ins. of Sch. EMC Nat’l Life Ins. An award will not be vacated for indefiniteness unless it is not sufficiently clear or specific enough to be enforced if judicially confirmed [IDS Life Ins... of N. Dirs.D. see also Robbins v. 2007 U. Co. Inc. 659 F. Daihatsu Motor Co.N.]. gave the arbitrators the power to reach a particular issue [Reliastar Life Ins. Courts recognizing this doctrine will not disturb an arbitrator’s 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. v. 2001). Fenner.W. Other courts have rejected the “manifest disregard of the law” standard as “reflect[ing] precisely that mistrust of arbitration . Ins. Milwaukee Teachers’ Educ.3d 200. 832 (9th Cir. 808 F. a rule that cannot be vigorously applied in the teeth of an honorable engagement clause. 1346. 650 (7th Cir. 1995)].. Supp. 684 (11th Cir. and other relationships marked 40-111 . . Ins. 304 F. v. .2d 679. 208-09 (2d Cir.D. 28 F. which the [United States Supreme] Court [has] criticized” [Baravati v. Some courts have determined that an award also may be vacated when an arbitrator exhibits a “manifest disregard of the law” [see Westerbeke Corp. Pierce. 43 (1987).D. Misco. 1992)]. 1980)].S.Y...Y.3d 704. 1986). 1994). 484 U. recent reported cases in both reinsurance and non-insurance arbitrations should not provide confidence that this vein will prove to be a particularly promising angle to mine. 29.28 question whether arbitrators have exceeded their powers focuses on whether the arbitration agreement. Another potential challenge to an arbitral award is the assertion that the award is contrary to public policy [see United Paperworkers Int’l Union v. More action has occurred in the non-insurance context on this argument. Co. Day. Trenwick Reinsurance Co. Bobker. Mich.Understanding Reinsurance 40.

40. Example: The Tennessee Court of Appeals affirmed the trial court’s refusal to vacate an arbitral award on the basis of evident partiality. Blue Cross/Blue Shield. Ct. 708-10 (D. 378 F. unless it is a matter not affecting the merits of the decision upon the matter submitted. Consider: If the arbitration is conducted under the auspices of an arbitration organization. Inc. Co. Servs.V. 350 (8th Cir. v. Painewebber.” “Where the arbitrators have awarded upon a matter not submitted to them. 2002)]. 1995). Auth. App. LEXIS 838. 238 F. Agron. 2d 707.I. thing or property referred to in the award. Co. v.” and “Where the award is imperfect in matter of form not affecting the merits of the controversy” [9 U. 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). 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 figures or an evident material mistake in the description of any person.3d 347. 1993)]. Lines.28 New Appleman Insurance Practice Guide by imbalances of power such as consumer contracts. 2004). 2005 Tenn.C. Inc.3d 204. Gen. Examples: A federal district court ordered correction of an arbitral 40-112 .. Life and Accident Ins. Virgin Islands Hous. 208-09 (2d Cir. 1024 (10th Cir. This exception to the general deference granted arbitrators is very limited and can succeed only if the decision clearly violates explicit. 2005)]. App.2d 1020.S.. v. In the following limited circumstances. Supp. then the rules of that agency concerning appeals of arbitral awards may apply. 988 F. § 11]. Seymour v. 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. at *27-30 (Tenn. With sophisticated commercial entities on both sides of a reinsurance contract. 49 F. well-defined and dominant public policy that can be easily seen in laws or judicial precedent [Commercial Union Ins. Constr. where the party did not object to or seek clarification of the arbitrator’s disclosed conflict of interest until after an unfavorable award was issued [Bailey v. Am..

ARIAS-U..S. Supp.arias-us. v. Stolt Tankers.N. Membership Application. and Practical Guide to Reinsurance Arbitration Procedure — Complete 2004 Revised Edition.29 ARIAS Forms. 213 F. The AIDA Reinsurance and Insurance Arbitration Society.org. 40-113 . Ins. Confidentiality Agreement. rather than to change the relationship between the arbitrating parties following the arbitration award. 2002)]. These forms are available on the ARIAS-U. 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.D. Neutral Selection Procedure Request Letter. Inc. Confidentiality Affidavit... Umpire Questionnaire [see § 40. 2d 10. Order Requiring Respondent to Post Security. 652-53 (S.Y. Neutral Selection Questionnaire.S. Supp.S. conferences and workshops to educate prospective arbitrators.S. All of these decisions are motivated by a decision to correct an obvious clerical error.Understanding Reinsurance 40. Co. First State Ins. also provides a variety of forms related to specific stages of the arbitration process that are referenced in its “Practical Guide to Reinsurance Arbitration Procedure. Co. Hold Harmless Stipulation. v. website at www. 1999)]. ARIAS-U. is a not-for-profit corporation that promotes the improvement of the insurance and reinsurance arbitration process for the international and domestic markets.29 award to conform the amount of the written award to the amount the panel had verbally announced [Nationwide Mut. Umpire Selection Procedure Request Letter.47 below]. 14-16 (D.S. Discovery & Briefing Schedule. Lexis.. Mass.com Search: For information on international reinsurance issues. 40. 2d 645.” ARIAS-U. provides the following forms: • • • • • • • • • • • • • Application for Certification as an Arbitrator. Application for Qualification as Mediator. 36 F. provides training. Inc. ARIAS-U.

40. Enter specific search terms or date ranges. 40-114 .29 New Appleman Insurance Practice Guide try this source: Global Reinsurance.

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 Company’s net liability under policies.htm. subject to the terms. Enter this search request: reinsurance AND [state]. to .31 BRMA Reinsuring Clause Form 44 B (Surplus Share Agreement). conditions and limitations hereinafter set forth: LINES OF BUSINESS A.org/frommembers/ frommemcontractwd01. The liability of the Reinsurer with respect to each cession hereunder shall commence obligatorily and simultaneously with that of the Company. Use of Form: The wording stipulating the quota share terms is typically set forth in the contract’s “Reinsuring Clause. of the Company on risks insured under policies in force at or becoming effective or renewed at and after hour (date) (year).X. please see: ISO Policy Forms. subject to the terms. conditions and limitations hereinafter set forth. if any. covering the lines of business set forth below. 40. and classified by the Company as . “Net liability” as used herein is defined as the Company’s gross liability remaining after cessions.” “Limit and Retention” or “Limit of Liability” clause.com Search: For further jurisdiction-specific forms. available at http://www.brma.30 BRMA Reinsuring Clause Form 44 C (Quota Share Agreement). FORMS. including renewals. 40. Use of Form: The details of a surplus share agreement are usually contained in the “Reinsuring Clause. REINSURING CLAUSE The Company shall cede to the Reinsurer and the Reinsurer shall accept from the Company 100% of the first surplus liability. as hereinafter defined. Lexis. contracts and binders of insurance or reinsurance (hereinafter called “policies”) in force at and becoming effective at and after (hour) (date) (year).” the “Cessions and Limits” or the “Business Covered” clause of the contract. Several forms are reprinted from the Brokers and Reinsurance Markets Association (“BRMA”) Contract Reference Book. 40-115 .

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. Use of Form: The clause defining an excess of loss agreement can be called the “Reinsuring Clause. and classified by the Company as . known outstanding losses that have been reported to the 40-116 .” 40. REINSURING CLAUSE “By this Contract the Reinsurer agrees to reinsure the excess liability that may accrue to the Company under its policies. The form covers unearned premium. conditions an limitations hereafter set forth. “Excess liability” should be defined in the contract.40. it will forward to the Reinsurer a statement showing the proportion of such reserves applicable to the Reinsurer. policies and contracts providing insurance and reinsurance on the lines of business covered under this Contract. 40.33 BRMA Unauthorized Reinsurance Clause Form 55 A.32 BRMA Reinsuring Clause Form 61 C (Excess of Loss Agreement).” “Cover Clause. 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 company’s reserves.” and it sets forth the type of business covered and the method of determining whether a loss falls within the scope of the agreement. 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.” “Business Reinsured Clause” or “Application of Agreement Clause. The Reinsurer hereby agrees to fund such reserves in respect of unearned premium. The term “policies” as used herein means the Company’s binders. the Company agrees that when it shall file 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. UNAUTHORIZED REINSURANCE As regards policies or bonds issued by the Company coming within the scope of this Contract.32 B C New Appleman Insurance Practice Guide A policy written on an installment premium. subject to the terms. outstanding losses and incurred but not reported reserves (“IBNR”).

33 Reinsurer and allocated loss adjustment expense relating thereto. rehabilitator. plus reserves for losses incurred but not reported. 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 Company’s 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 certified or registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. the payment of which is due under the terms of this Contract and which has not been otherwise paid. and be utilized by the Company or any successor. notwithstanding any other provision of this Contract. and interest thereon not in excess of the prime rate shall accrue to the benefit of the Reinsurer. irrevocable and unconditional Letter of Credit issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves in an amount equal to the Reinsurer’s proportion of said reserves. (b) to make refund of any sum which is in excess of the actual amount required to pay the Reinsurer’s Obligations under this Contract.Understanding Reinsurance 40. (c) to fund an account with the Company for the Reinsurer’s Obligations. losses and allocated loss adjustment expense paid by the Company but not recovered from the Reinsurer. and (d) to pay the Reinsurer’s 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 . by operation of law. cash advances or a Letter of Credit. When funding by a Letter of Credit. any liquidator. of the Company including. unless otherwise provided for in a separate Trust Agreement: (a) to reimburse the Company for the Reinsurer’s Obligations. Such cash deposit shall be held in an interest bearing account separate from the Company’s other assets. the Reinsurer agrees to apply for and secure timely delivery to the Company of a clean. without limitation. as shown in the statement prepared by the Company (hereinafter referred to as “Reinsurer’s Obligations”) by funds withheld. receiver or conservator of the Company for the following purposes. 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.

however.40. within thirty (30) days after receipt of written request from the Reinsurer. with reasonable provision for verification. the statement shows that the Reinsurer’s Obligations are less than the balance of credit as of the statement date. the actual amount determined to be due. conservator or statutory successor) independent of each other. (b) If. the Company shall. the Company shall prepare a specific statement of the Reinsurer’s Obligations. receiver.” thus making the exceptions to the direct payments to the Company (or its liquidator. or more frequently as agreed but never more frequently than quarterly. or in the case of (d). All of the foregoing shall be applied without diminution because of insolvency on the part of the Company or the Reinsurer. Use of Form: This Article contains “payable on demand” language in the first sentence. receiver. within thirty (30) days after receipt of notice of such excess. 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. for the sole purpose of amending the Letter of Credit. The Offset provision in the final paragraph is for this Contract only.34 New Appleman Insurance Practice Guide is in excess of the actual amount required for (a) or (c). except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. reinsurance under this Contract shall be payable on demand. At annual intervals. conservator or statutory successor of the Company having authority to 40-118 .34 BRMA Insolvency Clause Form 19 M. Note that it also contains the word “or” rather than “and” in the second sentence after “New York Insurance Law. 40. the Company shall promptly return to the Reinsurer the excess amount so drawn. the Reinsurer shall. 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. in the following manner: (a) If the statement shows that the Reinsurer’s Obligations exceed the balance of credit as of the statement date. secure delivery to the Company of an amendment to the Letter of Credit increasing the amount of credit by the amount of such difference. on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any liquidator. INSOLVENCY In the event of the insolvency of the Company.

Understanding Reinsurance

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 specifically 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 filed 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 benefit 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

New Appleman Insurance Practice Guide

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 reinsurer’s 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 Reinsurer’s 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 specifies 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

Understanding Reinsurance

40.41

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 Confidentiality 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 Company’s 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

For the purpose of this Article. 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 . Use of Form: This clause is for use in excess of loss contracts where the percentage of coverage provided for XPL is specified in the Ultimate Net Loss article of the contract.42 BRMA Excess of Original Policy Limits Clause Form 15 A. 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. Insurance or other reinsurance recoveries. 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. EXTRA CONTRACTUAL OBLIGATIONS A. New Appleman Insurance Practice Guide 40. 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. shall be deducted when determining the total ECO loss under this reinsurance contract. but not limited to. 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. in connection with ultimate net loss in excess of the limit of its original policy.43 BRMA Extra Contractual Obligations Clause Form 16 D. EXCESS OF ORIGINAL POLICY LIMITS This Contract shall protect the Company. the following: failure by the Company to settle within the policy limit. “Extra Contractual Obligations” are defined 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.42 proceeding. Use of Form: This clause is for use in a reinsurance contract where the percentage of coverage provided for ECO is specified elsewhere in the contract. such liabilities arising because of. 40.40. which protect the Company for ECO. within the limits hereof. However. or by reason of alleged or actual negligence.

disaster or loss occurrence. the formation.45 BRMA Arbitration Clause Form 6 A. casualty. shall inure to the benefit of the Reinsurer. loss adjustment expense. 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.44 BRMA Intermediary Clause Form 23 A. defense or settlement of any claim covered hereunder. 40. INTERMEDIARY (Intermediary Name) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. return premium. performance. interpretation. taxes. D.45 reinsured or in the preparation or prosecution of an appeal consequent upon such action.” This language is intended to grant arbitrators broad authority to hear disputes that could arise under or 40-123 . All communications (including but not limited to notices. or relating to. statements. B. 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. losses. to be the date of the original accident. The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed. Recoveries from any other form of insurance or reinsurance. 40. salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through (Intermediary Name and Address). which protects the company against claims the subject matter of this Article. in all circumstances. 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. premium. commissions.Understanding Reinsurance 40. However. Payments by the company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Use of Form: This clause defines arbitrable matters as “any dispute or other matter in question between the Company and the Reinsurer arising out of. C. or breach of this Contract.

If the two arbitrators do not agree on a third arbitrator within sixty (60) days.45 New Appleman Insurance Practice Guide with respect to the contract. all such reinsurers shall constitute and act as one party for the purposes of this Article.” This clause also expressly permits the parties to agree upon a different location for the hearing from that which is specified. of their appointment. State). or such other place 40-124 . 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. nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint. the arbitrators shall not have a personal or financial interest in the result of the arbitration. The second paragraph addresses the situation where more than one reinsurer has taken the same position with respect to a dispute with the cedent. shall be settled by arbitration. whether such dispute arises before or after termination of this Contract. If more than one reinsurer is involved in the same dispute.” which paraphrases the language of the FAA.S. ARBITRATION Any dispute or other matter in question between the Company and the Reinsurer arising out of. provided. 9 U. authorizing certain courts to confirm an award. Parties seeking to avoid mandatory consolidation in the event of a dispute can substitute the phrase “may consolidate” for “shall consolidate. however. including disputes relating to the formation and validity of the arbitration clause. Each party shall appoint an individual as arbitrator and the two so appointed shall then appoint a third arbitrator. The arbitration hearings shall be held in (City. or relating to. rather than joint. the other party may appoint the second arbitrator. it provides that “[j]udgment on the award may be entered in any court having jurisdiction thereof. Under this wording.C § 9. defenses or claims. that nothing herein shall impair the rights of such reinsurers to assert several. performance or breach of this Contract. The arbitrators shall be active or retired officers of insurance or reinsurance companies or Lloyd’s London Underwriters. Each arbitrator shall then decline two of the nominations presented by the other arbitrator. If either party refuses or neglects to appoint an arbitrator within sixty (60) days. each of the arbitrators shall nominate three individuals. interpretation.40. the formation. In addition. The third arbitrator shall then be chosen from the remaining two nominations by drawing lots. the reinsurers must consolidate and act jointly for the purposes of the arbitration.

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. whether arising before or after termination of this Contract. 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. Each party shall appoint an arbitrator within thirty (30) days of being requested to do so. 40. and the choice shall be made by drawing lots. see § 40. The arbitrators shall not be obliged to follow judicial formalities or the rules of evidence except to the extent required by governing law. 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. 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. All arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies or Underwriters at Lloyd’s London. If either party refuses or neglects to appoint an arbitrator within the time specified.46 as may be mutually agreed. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. ARBITRATION As a precedent to any right of action hereunder. the other party may appoint the second arbitrator.24]. If the two arbitrators fail to agree on a third arbitrator within thirty (30) days of their appointment. such differences shall be submitted to arbitration upon the written request of one of the contracting parties. not under the control of either party to this Contract. each of them shall name three individuals. of whom the other shall decline two. they shall make their decisions according to the practice of the reinsurance business. 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.” 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. The decision rendered by a majority of the arbitrators shall be final and binding on both parties.46 BRMA Arbitration Clause Form 6 E.Understanding Reinsurance 40. and the two named shall select a third arbitrator before entering upon the arbitration. that is. All arbitrators shall interpret this Contract as an 40-125 . the state of the situs of the arbitration as herein agreed.

the expense of the arbitrators and the arbitration shall be equally divided between the two parties.47 ARIAS-U.40.47 New Appleman Insurance Practice Guide honorable engagement rather than as merely a legal obligation. ARIAS-U.S. 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. shall be final and binding on both parties.1. and with the particular contracts involved in the dispute. 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. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. This form can be tailored for partyarbitrators if the parties so desire. They are relieved of all judicial formalities and may abstain from following the strict rules of law. Any arbitration shall take place in the city in which the Company’s Head Office is located unless some other place is mutually agreed upon by the contracting parties. certifies a pool of qualified arbitrators and serves as a resource for parties involved in a dispute to find the appropriate persons to resolve the matter in a professional. knowledgeable and cost-effective manner. 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. The decision in writing of any two arbitrators. Use of Form: The AIDA Reinsurance and Insurance Arbitration Society.S. when filed with the contracting parties. 40.. Umpire Questionnaire Sample Form 2. UMPIRE QUESTIONNAIRE In the Matter of the Arbitration Between 40-126 . 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. In the event that two arbitrators are chosen by one party as above provided.

Please provide a copy of your current fee schedule. Respondent ⎫ ⎪ ⎪ ⎬ ⎪ ⎪ ⎭ UMPIRE QUESTIONNAIRE To help the parties evaluate the qualifications of umpire nominees in the above-captioned arbitration.Name: Company: Address: Telephone: Fax: Cell Phone: Email: Home Address: Telephone: 2. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ 3. . please supply the following information: 1. PAST QUALIFYING EMPLOYMENT (if not currently an officer of an insurance or reinsurance company [or an Underwriter at Lloyd’s of London] and if not apparent from the attached résumé or CV). A. and to identify any potential conflict of interest. Current Employment (if not apparent from the attached résumé or CV) Position Title: Length of Employment: Principal Duties: B. including any refundable or non-refundable retainer. INSURANCE ARBITRATION EXPERIENCE 40-127 .and .Understanding Reinsurance 40. EMPLOYMENT HISTORY (please attach a current résumé or CV). 4. Petitioner.47 .

_________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ B. 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 . or of the parties’ subsidiaries.40. umpire. REINSURANCE ARBITRATION EXPERIENCE Have you previously participated as an arbitrator or umpire in connection with reinsurance disputes? [ ] Yes [ ] No If yes. Are you presently or have you ever been an employee. affiliates and parent companies] [ ] Yes [ ] No If yes. director. please set forth: Number of appearances as an umpire: _________________________________________________________________ _________________________________________________________________ Number of appearances as an arbitrator: _________________________________________________________________ _________________________________________________________________ 5. POTENTIAL CONFLICTS A. please set forth: Number of appearances as an umpire: _________________________________________________________________ _________________________________________________________________ Number of appearances as an arbitrator: _________________________________________________________________ _________________________________________________________________ 6. shareholder. affiliates or parent companies? [List of all applicable parties. please explain. subsidiaries. agent or consultant of any of the parties listed below. Have you ever served as an arbitrator. officer.47 New Appleman Insurance Practice Guide Have you previously participated as an arbitrator or umpire in connection with insurance disputes? [ ] Yes [ ] No If yes.

To your knowledge. affiliates or parent companies? [ ] Yes [ ] No If yes. Have you ever had any involvement in an insurance or reinsurance transaction or dispute involving any of the specific claims. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ EXPERIENCE WITH OTHER PANEL MEMBERS AND PARTIES’ COUNSEL A. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ C. policies and/or treaties at issue in this matter as described in Question 8 below? [ ] Yes [ ] No _________________________________________________________________ _________________________________________________________________ If yes.47 [ ] Yes [ ] No If yes. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ D. please explain. please explain. do any companies with which you are presently affiliated or in which you presently have a financial interest have an ongoing business relationship with any of the parties and/or affiliates listed above? [ ] Yes [ ] No If yes. or involving such parties’ subsidiaries.Understanding Reinsurance 40. please explain. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ E. Have you ever served on an arbitration panel with 40-129 . please explain. Have you ever had any involvement in an insurance or reinsurance transaction or dispute involving any of the parties.

. umpire. state the approximate date of commencement and termination (or whether still pending) and the respective capacities in which you and acted. Have you ever served as an arbitrator. state the approximate date of commencement and termination (or whether still pending) and the respective capacities in which you and acted. i. i. Have you ever served ? on an arbitration panel with Name of Arbitrator [ ] Yes [ ] No If yes. identify counsel and disclose type of service and approximate date so engaged. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ B. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ C. Have you ever served as an arbitrator. for each such arbitration. as arbitrator or 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.. 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. for each such arbitration.e. umpire. identify counsel and disclose type of service and approximate date so engaged.40. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ D.47 New Appleman Insurance Practice Guide ? Name of Arbitrator [ ] Yes [ ] No If yes. as arbitrator or umpire. _________________________________________________________________ 40-130 .e.

please explain.47 _________________________________________________________________ _________________________________________________________________ 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. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ Signature: Date: 40-131 . _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ 9.Understanding Reinsurance 40. 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.

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