STUDENT NAME: L.

SAI RADHA KRISHNA

TOPIC NAME: REINSURANCE RELATED LAWS

ROLL.NO: 2016055 / A
 RE-INSURANCE RELATED LAWS

1. INTRODUCTION & BACKGROUND

Reinsurance is insurance for insurance companies. It’s a way of transferring or “ceding” some of
the financial risk insurance companies assume in insuring cars, homes and businesses to another
insurance company, the reinsurer. Reinsurance is a highly complex global business. U.S.
professional reinsurers (companies that are formed specifically to provide reinsurance)
accounted for about 7 percent of total U.S. property/casualty insurance industry premiums
written in 2010, according to the Reinsurance Association of America.

The reinsurance business is evolving. Traditionally, reinsurance transactions were between two
insurance entities: the primary insurer that sold the original insurance policies and the reinsurer.
Most still are. Primary insurers and reinsurers can share both the premiums and losses, or
reinsurers may assume the primary company’s losses above a certain dollar limit in return for a
fee. However, risks of various kinds, particularly of natural disasters, are now being sold by
insurers and reinsurers to institutional investors in the form of catastrophe bonds and other
alternative risk-spreading mechanisms.

Reinsurance is insurance for insurance companies. Just as a homeowners or auto insurance

policy reduces the amount of cash a person must have on hand to pay for a new car after an
accident or to rebuild a home after a hurricane, a reinsurance contract can protect an insurance
company against large catastrophic losses. Reinsurance also enables an insurer to underwrite
more or larger insurance policies.1

When an insurance company issues an insurance policy, an auto insurance policy, for example, it
assumes responsibility for paying for the cost of any accidents that occur, within the parameters
set out in the policy.

1
Choice Of Law Provisions In Reinsurance Agreements - Frederick J. Pomerantz - Tort & Insurance Law Journal, Vol.
29, No. 1 (FALL 1993), pp. 158-168
By law, an insurer must have sufficient capital to ensure it will be able to pay all potential future
claims related to the policies it issues. This requirement protects consumers but limits the
amount of business an insurer can take on. However, if the insurer can reduce its responsibility,
or liability, for these claims by transferring a part of the liability to another insurer, it can lower
the amount of capital it must maintain to satisfy regulators that it is in good financial health and
will be able to pay the claims of its policyholders. Capital freed up in this way can support more
or larger insurance policies. The company that issues the policy initially is known as the primary
insurer. The company that assumes liability from the primary insurer is known as the reinsurer.
Primary companies are said to “cede” business to a reinsurer.

REVIEW OF LITERATURE

1. The Contract Of Reinsurance – W. R. Vance, The Virginia Law Register, Vol. 7, No.
10 (Feb 1902) pp. 669-679

This article contains the essential characteristics of the reinsurance and some incidents relating
to the law of reinsurance and special rules of law applying to the reinsurance. The article also
speaks about the validity of contract, rights of the original insured and many related aspects of
reinsurance.

2. International Insurance and Reinsurance Developments – Vincent Vitkowsky, Peter

Maloney, James Haddad, Paul, and David Whelehan, The International Lawyer, Vol.
34, No. 2. 1999, pp. 473-483

This article contains reviews international insurance and reinsurance developments in 1999. The
article also includes developments in the international insurance business environment such as
the deregulation and privatization of insurers and the development of offshore insurance
markets; litigation and arbitration of insurance and reinsurance disputes developments in recent
cases.

3. Regulating Reinsurance in the Global Market – Marie-Louise Rossi and Nicholas

Lowe, The Geneva Papers on Risk and Insurance Issues and Practice, Vol. 27, No. 1
(January 2002), pp. 122-133
This article contains the differences between the reinsurance and insurance regulations and also
of the foreign insurers and prudential regulations are also mentioned in this article

4. Reinsurance and the Liability Insurance Crisis – Lawrence Berger, David Cummings
and Sharon Tennyson, Journal of Risk and Uncertainty, Vol. 5, No.3 (1992), pp. 253-
272

The article contains about the extent to which events in reinsurance markets affected liability
insurance market outcomes. It documents significant shocks to reinsurance supply in the early
1980s and finds evidence of subsequent disruptions to the price and availability of reinsurance.
Regression analysis of liability insurance profitability over the time period supports the
hypothesis that problems in reinsurance markets played an important role in the crisis.

2. TYPES OF REINSURANCE

Reinsurance can be divided into two basic categories: treaty and facultative. Treaties are
agreements that cover broad groups of policies such as all of a primary insurer’s auto business.
Facultative covers specific individual, generally high-value or hazardous risks, such as a
hospital, that would not be accepted under a treaty.

In most treaty agreements, once the terms of the contract, including the categories of risks
covered, have been established, all policies that fall within those terms – in many cases both new
and existing business—are covered, usually automatically, until the agreement is cancelled.

With facultative reinsurance, the reinsurer must underwrite the individual “risk,” say a hospital,
just as a primary company would, looking at all aspects of the operation and the hospital’s
attitude to and record on safety. In addition, the reinsurer would also consider the attitude and
management of the primary insurer seeking reinsurance coverage. This type of reinsurance is
called facultative because the reinsurer has the power or “faculty” to accept or reject all or a part
of any policy offered to it in contrast to treaty reinsurance, under which it must accept all
applicable policies once the agreement is signed.
Treaty and facultative reinsurance agreements can be structured on a “pro rata” (proportional) or
“excess-of-loss” (non proportional) basis, depending on the arrangement by which losses are
apportioned between the two insurers.
In a proportional agreement, most often applied to property coverage’s, the reinsurer and the
primary company share both the premium from the policyholder and the potential losses.

In an excess of loss agreement, the primary company retains a certain amount of liability for
losses (known as the ceding company’s retention) and pays a fee to the reinsurer for coverage
above that amount, generally subject to a fixed upper limit. Excess of loss agreements may apply
to individual policies, to an event such as a hurricane that affects many policyholders or to the
primary insurer’s aggregate losses above a certain amount, per policy or per year.

A primary company’s reinsurance program can be very complex. Simply put, if it were
diagrammed, it might look like a pyramid with ascending dollar levels of coverage for
increasingly remote events, split among a number of reinsurance companies each assuming a
portion. It would include layers of proportional and excess of loss treaties and possibly a
facultative excess of loss layer at the top.2

3. COMMON LAW APPROACH

The essential characteristics of the common law approach to jurisdictional disputes may be said
to be, firstly, that jurisdiction was available on the ground of the presence of the defendant
within the jurisdiction and other broad or exorbitant grounds which might be expected to give
some sort of connection between the dispute and the jurisdiction; but, secondly, that potential
excesses of jurisdiction were tempered by the principle of forum non conveniens under which
the court would decline jurisdiction in favor of another clearly more appropriate forum. Choice
of law was based on the express, implied or imputed choice of the parties.

2
A Closer Look At Facultative Reinsurance - Richard C. Mason and James E. Pfeifer II - Tort & Insurance Law
Journal, Vol. 31, No. 3 (SPRING 1996), pp. 641-662
Although (re)insurance disputes involved their own particular "spin" on such questions, the
fundamental private international law tests were the same, whether the dispute was a
(re)insurance dispute or some other civil or commercial piece of litigation. In other words,
private international law questions in (re)insurance disputes tended to involve the application of
common and widely understood principles, albeit that the application of such principles involved
factors specific to (re)insurance, for instance, the mode of contracting and administering which
is often different from that in other areas, and the situs of the risk (re)insured.

4. INTERNATIONAL BUSINESS DEVELOPMENTS

In March 1999, the General Agreement on Trade in Services (GATS), went into effect. Although
negotiated in 1994, the treaty only went into force in 1999, according to the schedule previously
determined in the Fifth Protocol. GATS is a multilateral, international agreement whose
signatories have agreed to create enforceable rights to trade in services based on the principles of
"national treatment" (nondiscrimination among locals and foreigners), and "most-favored-nation
status" (equal treatment of all the other members of the agreement). The agreement is designed
to enhance free trade of services such as insurance and reinsurance among the signatories by
providing an agreed framework for reducing prejudicial regulations, and a system for
adjudicating trade disputes through the World Trade Organization (WTO).

India, long a closed and government-monopolized market, is a signatory to GATS and is

expected to open its market to foreigners through the licensing of branch offices and limited,
direct foreign ownership. Reports suggest India may pass legislation, the Insurance Regulatory
and Development Authority Bill of 1998, by the end of this year, which would allow the
licensing of private insurers and foreign equity participation, to a maximum of twenty-six
percent, in joint venture insurance companies. However, as India has been involved in a general
parliamentary election, the bill may be delayed. In anticipation of the bill, India has nonetheless
begun the registration of names for new private insurance companies.

The United States is moving to improve the competitiveness of U.S. insurers in the increasingly
more global insurance market. Thus, the Policyholder Disaster Protection Act of 1999, pending
in Congress, would, among other things, change the tax treatment of loss reserves for unincurred
liabilities, i.e., funding set aside for future risks such as hurricanes and earthquakes. Such
reserves currently are not tax-exempt in the United States, but are in Europe, creating, it is
argued, a competitive disadvantage for U.S. firms.

In addition, Congress passed modernization legislation8 that repealed the Glass-Steagall Act
provisions that historically separated the U.S. banking and insurance industries. It is argued that
such reform is necessary for U.S. insurers to compete globally with foreign insurers not bound
by similar division of the financial services sectors. The well-publicized merger of U.S. giants
Citicorp and Travelers Insurance Company depended on passage of the bill.3

5. REINSURANCE MARKETS

A complete representation of events in reinsurance markets is difficult to obtain due to the

structure of the market. It is a highly international market, and hence there is no single
organization responsible for developing market wide statistics. The resulting difficulty in
documenting trends is exacerbated by the many types of insurance concerns offering
reinsurance, in addition to specialist reinsurers. Firms within a single insurance conglomerate or
group usually engage in reinsurance transactions; and many insurance groups also operate
separate reinsurance subsidiaries. In addition, captive insurers participate in the reinsurance
market.13 In 1982, for example, only 54% of reinsurance premiums reported by U.S. licensed
firms were written by professional reinsurers; 17% were written by reinsurance subsidiaries of
primary carriers, and the remaining 29% were written by non licensed alien reinsurers, including
captives.

The Reinsurance Association of America (RAA) gathers statistics from approximately 73

professional reinsurers licensed in the U.S. The A.M. Best Company (Best's) reports extensive
statistics of over 900 insurance corporations operating in the U.S. Most firms in the Best's
sample are primary market insurers, but data on the reinsurance transactions of these firms are
reported. Some information on international reinsurance markets is also available. Statistics on
London reinsurance market transactions of U.S. insurers can be obtained from the Reinsurance
Offices Association (ROA). 14 The ROA gathers data on the worldwide reinsurance transactions
of a variety of professional reinsurers operating in the London market. While none of these

3
International Insurance and Reinsurance Developments - Vincent J. Vitkowsky, Peter T. Maloney - The
International Lawyer, Vol. 34, No. 2 - 1999 (SUMMER 2000), pp. 473-483
sources provides exhaustive data on reinsurance activities, trends substantiated by these distinct
sources should be representative of the market.4

6. REINSURANCE ARBITRATION

In general, most reinsurance contracts, especially reinsurance treaties, contain an arbitration

clause. Arbitration clauses in reinsurance contracts tend to be very broad. This means that
virtually any dispute or disagreement concerning the interpretation or application of any part of
the reinsurance contract, including its formation, must be decided by arbitration. Arbitration has
been the traditional method of dispute resolution for reinsurance disputes for many decades.
Insurance and reinsurance companies would rather have their disputes resolved by a panel of
industry experts who will decide disputes based on industry custom and practice. Traditional
reinsurance arbitration clauses relieve the arbitrators from following the strict rules of law and
specifically require the arbitrators to consider the reinsurance contract as an honorable
engagement rather than a strict legal obligation. This way, instead of a judge that knows nothing
about the industry and who will construe the reinsurance agreement like any commercial
contract, reinsurance disputes are determined based on industry business practices by industry
experts.

Reinsurance arbitrations are also private, confidential proceedings that are not open to public or
competitor scrutiny. This is another reason why many insurers and reinsurers would rather
arbitrate than litigate. While information about arbitrations often does find its way into the
industry press, especially if a party goes to court to seek to confirm or vacate an arbitration
award, for the most part, the details of the award and the dispute are kept confidential.

Most reinsurance arbitrations traditionally do not require adherence to any particular set of rules.
Unlike contracts that require arbitration before a specific arbitral organization under that
organization's rules (e.g., the American Arbitration Association and its Commercial Arbitration
Rules), reinsurance arbitration traditionally has no set of rules to follow. The parties and the
arbitrators set their own rules for the arbitration.

4
Regulating Reinsurance in the Global Market - Marie-Louise Rossi and Nicholas Lowe - Papers on Risk and
Insurance. Issues and Practice, Vol. 27, No. 1
(January 2002), pp. 122-133
As reinsurance arbitrations became more prevalent during the past decade, insurance and
reinsurance professionals came together in a task force to put into writing the traditional ad hoc
reinsurance arbitration procedures that most parties followed. Those rules, called the Procedures
for the Resolution of U.S. Insurance and Reinsurance Disputes, are slowly being incorporated
into reinsurance contracts by some companies, but widespread usage is not yet commonplace.

7. INCREASED SCRUTINY AND REGULATION OF REINSURERS

Recent developments have spawned a bevy of initiatives aimed at regulating international

reinsurers. These range from capital standards to solvency to sanctions for reinsuring insurance
companies doing business with parties on sanctions lists. A current example of the expansion of
regulation over global insurance and reinsurance organizations is the idea that an insurance
company can be so systematically important to an economy that it must be designated too big to
fail. What that designation means is yet another set of capital and financial requirements
imposed upon designees beyond the existing insurance regulations. Efforts to determine whether
insurance and reinsurance companies are systemically significant are taking place
simultaneously on a global basis with the international Financial Stability Board and within the
United States under the Financial Stability Oversight Council of the Treasury Department.

Both of these organizations were created to deal with the failure of large banks and investment
firms and the effects of those failures on local and world economies. In looking at whether
financial institutions are too big to fail, these organizations have targeted banks and investment
firms, but they have also examined and designated nonbanking organizations, including some
insurance companies, as too big to fail.

For example, the Financial Stability Board has designated nine systemically important insurers,
which include insurance companies that have reinsurance divisions or subsidiaries. The
Financial Stability Oversight Council has only designated one insurance company to date, but
others may be designated in the future, including companies with reinsurance divisions or
subsidiaries. Enforcement of these designations is currently being debated before the G20.

Another example of expanding regulation over reinsurance is sanctions. Violations of economic

sanctions instituted by the United States and other countries against persons, groups, or countries
that are considered outside proper international behavior are starting to be an issue for reinsurers.
For example, the country of Iran and many people, organizations, and businesses connected to
Iran are listed on sanctions lists. Reinsurers may find themselves subjected to possible sanctions
if they or their affiliates reinsure ceding insurers that happen to write insurance for a person or
organization on the ever-changing sanctions lists.

Taxes are another example of expanding regulation of reinsurance. Offshore reinsurers have
been the target of various efforts to rein in what some see as funds going offshore instead of
being taxed in the United States. Various tax bills addressing so-called tax reforms have
provisions addressed to offshore entities, including offshore reinsurers. This is an area that non-
US reinsurers (and insurers) are watching carefully if they do business in the United States or
have US subsidiaries.

Another tax area affecting reinsurers is the Foreign Account Tax Compliance Act (FATCA),
which has certain reporting and withholding requirements for foreign financial and nonfinancial
institutions, including reinsurance intermediaries, depending on how a company is defined. This
is a somewhat complicated area of tax law, but the focus is on US taxpayers with foreign
accounts or assets or non-US entities in which US taxpayers hold a substantial interest. FATCA
deals with withholdings required under certain circumstances for qualified entities under the act.

CASE ANALYSIS

CASE NAME: FIRST STATE IND. CO. V. NATIONAL CAS. CO.

CASE CITATION: 781 F.3d 7 (1st Cir. 2015)

BENCH: LAWRENCE S. GREENGRASS, ANN E. HALDEN

COURT: UNITED STATES COURT OF APPEALS, FIRST CIRCUIT

FACTS OF CASE:

National Casualty requested that the court vacate an arbitration panel’s contract interpretation
award, claiming that the arbitrators had exceeded their powers by re-writing the terms of the
parties’ agreement.  The court held that the sole inquiry is whether the arbitrators “even
arguably” construed the underlying agreements in reaching their decision and, thus, acted within
the scope of their contractual powers.  The court noted that only if the arbitrators acted so far
outside the bounds of their authority that they can be said to have dispensed their “own brand of
justice” will a court vacate the award.  The court reviewed the arbitration award and held that, in
its view, there was no doubt that the arbitrators were interpreting the reinsurance agreement at
issue and therefore had not acted beyond their authority.

In addition, with respect to the portion of the arbitration award that required National Casualty to
specifically reserve its rights in order to preserve any objections to claim payments, the court
held that honourable engagement language of the reinsurance agreement empowered the
arbitrators to grant equitable relief not explicitly mentioned in the underlying agreement (such as
setting up the reservation of rights procedure).  The court therefore denied the petition to vacate
and affirmed the order confirming the contract interpretation award.

ISSUE INVOLVED:

Whether an arbitration award should be vacated where a party argues that the arbitrators
exceeded their powers.

HELD:

Court will not vacate an arbitration award where the award is based on the agreements being
arbitrated.  In addition, honorable engagement language in an arbitration agreement empowers
arbitrators to grant equitable relief not explicitly mentioned in the underlying contract.

CASE NAME: JEFFERSON INSURANCE CO. V. FORTRESS RE, INC.,

CASE CITATION: 616 F. SUPP. 874 (S.D.N.Y. 1984)

BENCH: HAIGHT, DISTRICT JUDGE

COURT: UNITED STATES DISTRICT COURT, NEWYORK

FACTS OF THE CASE:

The case involved a reinsurance agreement covering payments in excess of $100,000 for claims
arising from accident liability coverage issued by the cedent to a New York taxicab company. In
June 1975, the insured was involved in an accident in which a cab driver injured two
pedestrians. Notice was provided to the cedent in October of that year upon the filing of a
complaint by the pedestrians.

Three years into the action, the cedent examined the plaintiff’s medical conditions for the first
time and concluded that a jury verdict could easily reach $400,000. The case was subsequently
settled, and the cedent sought to recover a portion of the settlement payment from the reinsurer.
The reinsurer denied the claim because the cedent failed to give timely notice of its claim under
the reinsurance agreement. The notice clause also provided for the reinsurers right to associate.

HELD:

The district court, applying North Carolina law, held that the cedent’s provision of notice to the
reinsurer after the medical examination was untimely. The court noted that the complaint
demanded $450,000 and that the facts made clear that the plaintiffs would prevail on the issue of
liability. The court rejected the cedent’s claim that it was not required to notify the reinsurer of a
claim until it itself became aware that the claim was likely to involve reinsurance, which in this
case did not happen until after the medical examination.

The court found that the reinsurer was denied the opportunity to participate in the defense of the
claim and held that the fulfillment of timely notice required the cedent to make active inquiries
into the merits of the claim and the likelihood that the claim would involve reinsurance.

CASE NAME: EXCESS INSURANCE CO. LTD. V. FACTORY MUT. INS. CO.

CASE CITATION: 3 N.Y.3d 577, 822 N.E.2d 768, 789 N.Y.S.2d 461 (2004)

BENCH: AMY S. KLINE

COURT: NEW YORK COURT OF APPEALS

FACTS OF THE CASE:

Defendant Factory Mutual (formerly known as Allendale Mutual Insurance Company) insured a
warehouse in Seclin, France. Defendant then obtained reinsurance from plaintiffs for a large
portion of the risk. The reinsurance agreement contained a "Limit" provision limiting the
reinsurance coverage to $7 million (U.S.) for any one occurrence. Immediately following this
"Limit" provision were listed "Conditions," including the condition that "Reinsurers agree to
follow the settlements of the Reassured in all respects and to bear their proportion of any
expenses incurred, whether legal or otherwise, in the investigation and defence of any claim
hereunder."

The warehouse burned down, and defendant commenced an unsuccessful litigation against the
insured. After spending approximately $35 million in litigation expenses, defendant abandoned
the litigation and settled with the insured for nearly $100 million.

The motion court concluded that the $7 million limit of the reinsurance coverage did not apply
to the litigation expenses referred to in the "follow the settlements" clause contained in the
agreement's "Conditions." We disagree, holding that the $7 million limit of the reinsurance
policy is not superceded or overruled by the "follow the settlements" section of the policy, and
so the expenses for which plaintiff reinsurers are obligated to reimburse defendant reinsured,
including those pursuant to the "follow the settlements" section, cannot exceed the overall $7
million limit of the policy.

Initially, we conclude that New York law should be applied. In a conflicts of law analysis, the
first consideration is whether there is any actual conflict between the laws of the competing
jurisdictions. If no conflict exists, then the court should apply the law of the forum state in which
the action is being heard (see Matter of Allstate Ins. Co. [Stolarz], 81 N.Y.2d 219, 223
[1993]; Taylor v American Bankers Ins. Group, 267 A.D.2d 178 [1999]). Here, defendant's sole
claimed difference in the laws of the two states is that it claims Rhode Island allows a court,
when interpreting a contract, to consider extrinsic evidence. We disagree, and conclude that no
such conflict exists.

Under Rhode Island law, as under New York law, "the clear and unambiguous language set out
in a written instrument is controlling as to the intent of the parties thereto and governs the legal
consequences of the contract provisions" (Theroux v Bay Assoc., Inc., 114 R.I. 746, 749, 339
A.2d 266, 268 [1975]; see Chapman v Vendresca, 426 A.2d 262 [RI 1981]; Supreme
Woodworking Co. v Zuckerberg, 82 R.I. 247, 252, 107 A.2d 287, 290 [1954]). We do not
read Westinghouse Broadcasting Co., Inc. v Dial Media, Inc. (122 R.I. 571, 410 A.2d
986 [1980]) as altering this well-established rule. Therefore, the expert affidavit submitted by
defendant regarding industry custom is extrinsic evidence which should not be considered in
interpreting this clear and unambiguous document.

Even if a conflict in the two states' law existed, under the complex circumstances here, the mere
fact that defendant is a Rhode Island company which paid the underlying policy premiums from
Rhode Island would not justify the application of Rhode Island law. We also note that
throughout the four years of the parties' litigation in the Federal District Court, defendant took
the position that New York law applied.

ISSUE INVOLVED:

Whether reinsurers’ obligation to pay sums for certain loss adjustment expenses arising from a
“follow the settlements” clause is subject to the indemnification limit stated in a reinsurance
policy.

HELD:

The trial court ruled first that the expenses were in addition to limits, a holding that was reversed
by the intermediate appeal court. The court of appeals was thus called on to determine whether
the $7million limit operated as a hard cap on the reinsurer’s liability, inclusive of expenses.
Concluded that it was indeed a cap and that the reinsurers could not be required to pay loss
adjustment expenses in excess of the certificate’s stated limit. Any other holding, the court
noted, would expose the insurers to unlimited expense liability and would render meaningless
the negotiated $7million limit.

CONCLUSION:

Reinsurers typically only address claims after the ceding insurer has paid them. This means that,
by the time a long tail exposure claim reaches the reinsurance level, it has been around for a
substantial period of time. So, why would reinsurers care about emerging risks? Because
understanding new and developing exposures fueled by scientific advancement and developing
legal theories is critical to managing loss and the financial viability of the industry. Reinsurers
play a critical role in making sure the entire insurance industry is cognizant of what exposures
should be expected in the future.