Why Reinsurance Matters, - Squire Patton Boggs

Why Reinsurance Matters, and Other Must-Know Reinsurance Concepts

May 2019


Reinsurance Matters

The quality of the reinsurance security pur-chased by the direct insurer is what helps to en-sure that losses will be paid. It is therefore im-portant to understand the reinsurance function,relationship, claims services, and fronting ar-rangements.

Copyright © 2019 International R

Risk managers and other purchasers of insur-ance rarely think about how reinsurance af-fects their company or the insurance they pur-chase for their company. Insurance buyersmainly focus on the direct insurers—the prima-ry, excess, and umbrella carriers that providethe coverage.

Smart insurance buyers look for insurance com-panies with high financial ratings and long his-tories of standing by their insureds when lossesoccur. Other buyers rely on their broker to puttogether the best quality insurance programwith the best insurance security available. Afterall, the insured must rely on the insurance poli-cy issued by the direct insurer.

Also in this issue

Reinsurance Terminology Explained:

About the Author ...

Larry Schiffer
Bordereau . . . . . . . . . . . . . . . . . . . . . . . . . .3
Reinsurance Contract Wording Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Adventures in Contract Wording: The Effect of Ambiguous

Partner, Squire Patton Boggs (US) LLP

Mr. Schiffer practices in the areas ofcommercial, insurance, and reinsurancelitigation, arbitration, and mediation, in-

ters concerning insurance insolvency and
Reinsurance Contract Language . . . . . . . . . .10
The Interplay between Fronting and MGA Arrangements . . . . . . . . . . . . . . . 13

If It Looks Like a Claim, and Sounds Like a Claim, Is It a Claimfor Reinsurance Purposes?. . . . . . . . . . . . . . 16

Playing the Name Game—An Updateon Cut-Through Clauses . . . . . . . . . . . . . . . 19

Allocation in the Mind of the Ceding Insurer . . . . . . . . . . . . . . . . . . . . . . 23

Interplay of Loss Portfolio Transfersand Other Reinsurance Contracts . . . . . . . . . 26

cluding matrun-off. He also advises on insurance and reinsurancecoverage and contract wording matters.

He serves as a mediator for the mandatory commer-cial mediation program of the US District Court for theSouthern District of New York and for the New YorkSupreme Court Commercial Division, Alternative Dis-pute Resolution Program.

Mr. Schiffer is active in the American Bar Associa-tion and the New York State Bar Association wherehe serves in leadership positions and several commit-tees.

1isk Management Institute, Inc.

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But what stands behind the A-rated insurer orthe high quality insurance program for a com-plex commercial risk? Reinsurance. Commercialinsurance cannot exist without reinsurance. Thequality of the reinsurance security purchased bythe direct insurer is what helps to ensure thatlosses will be paid.

The Reinsurance Function

Quality reinsurers provide special expertise totheir direct insurer clients and assist the directinsurer in providing the best possible protectionand risk management for the direct insurer’sown clients. Some large professional reinsurershelp small insurance companies expand intonew areas and provide them with technical, ac-tuarial, and claims expertise and training.

Reinsurance has been defined in various ways byexpert commentators and the courts. In simpleterms, reinsurance is insurance for insurance com-panies provided in the form of a contract of in-demnity rather than a liability contract. Generally,the direct insurer must first pay a loss and thenseek reimbursement for that loss from its reinsurer.

Stated another way, reinsurance essentially isan extension of the theory of insurance itself.The insurance risk is spread from one risk bear-er to other risk bearers. This allows the initialrisk bearer to continue to provide insuranceproducts to its clients, knowing that when loss-es occur, others will share those losses. Rein-surance also allows a direct insurer to strength-en its balance sheet by reducing its liability forloss and replacing that liability with an asset.

The Reinsurer/Insured Relationship

The relationship between a reinsurer and the in-sured differs markedly from the insurer/insured

relationship. Generally, there is no contractualrelationship between the insured and a reinsurer,and no right of action by the insurer against thereinsurer. The insured must look to its insurer forpayment of any claims, not to the reinsurer.

Under normal circumstances, the reinsurer hasno interaction with the insured. Usually, theidentity and often the existence of the reinsurerare unknown to the insured. Why then shouldthe insurance buyer care about reinsurance ifthere is no contractual relationship or interac-tion between the two?

Depending on the insurance program pur-chased, the reinsurance standing behind that in-surance may have a significant impact on the in-sured when losses arise. A highly leveragedinsurance program that predominantly relies onreinsurance may create a substantial risk for theinsured. If the reinsurance fails—the reinsurersrefuse to pay or become insolvent—the direct in-surer may have serious difficulty responding toclaims if the direct insurer reinsured or cededmost of the risk to its reinsurance program.

Although the direct insurer is solely responsibleto the insured for claims, the failure of a reinsur-ance program behind the direct insurer may re-sult in the insolvency of the direct insurer. This,in turn, may result in the insured effectively be-coming a self-insurer and relying on state securi-ty funds for the minimal protection they pro-vide.

Risk Management/Claims Services

A highly leveraged insurance program also maybe a sign that the direct insurer has very little in-terest in the program. Where the risk retained bythe direct insurer is minimal, the direct insurer


may not provide the level of risk managementand claims services that the insured may require.

A direct insurer that cedes the vast majority ofthe reported loss to its reinsurers may not wishto incur loss adjustment expenses, but wouldrather its reinsurers shoulder the loss. While thismay seem to favor the insured, whose claimswill be paid and passed along to reinsurers, thelack of proper claims handling may result in un-necessary loss payments and resistance from re-insurers who expect the reinsured to handleclaims properly.

Fronting Arrangements

The direct insurer’s interest in the insuranceprogram may be nonexistent because the directinsurer is merely acting as a front for the rein-surance program. Many commercial risk pro-grams are fronted because the risk bearers withthe expertise and interest in insuring the riskare not licensed to do business in the insured’sstate or are not licensed to write direct insur-ance. Generally, a fronted program is well-known to the insured and arranged in advance.

For example, it may be that the insurance mar-ket for a certain type of insurance is made onlyin London. The insured may be uncomfortablein accepting direct insurance through the excessor surplus lines market and may insist on li-censed or admitted paper. In that case, a li-censed direct insurer may write the policy andcede most of the risk to the market that pro-vides the actual coverage.

Sometimes, however, the direct insurer retainsenough of the risk so that the insured does notknow the program is really fronted. The direct in-surer may have little interest in the insurance pro-gram if it is merely collecting a fronting fee. The

fronting insurer will even reinsure its retainedportion of the risk through a separate reinsur-ance program, leaving it with none of the risk itoriginally assumed. Where the direct insurertransfers all of its risk to others, the likelihoodthat the direct insurer will provide the insuredwith any risk management services and stand bythe insured when claims arise is diminished.

Conclusion

These doomsday scenarios need not come trueif the insurance buyer insists on a high-qualityinsurer and questions the reinsurance protec-tion standing behind the insurance program ithas purchased. Reinsurance is a normal part ofthe risk transference system, and the insuredshould have comfort in knowing that its risk isbeing transferred in an appropriate manner toreinsurers of quality.

If the direct insurer refuses to discuss the rein-surance protection it anticipates for the pro-gram it plans to write for the insured, the in-sured should consider whether doing businesswith that insurer is the right business decisionfor the company. ❒

Reinsurance Terminology Explained: Bordereau

Reinsurance contracts are filled with exotic andequally mind-numbing terms like facultative cer-tificate, follow-the-fortunes, cede, treaty, honor-able engagement, ultimate net loss, and more.

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Some of our previous commentaries have ad-dressed a few of these terms, such as “Under-standing Reinsurance Terminology—Follow-the-Fortunes” (October 2001), “Sorting Out the Re-insurance Contract Morass” (March 2002), and“Reinsurancese—Time for a Change?” (March2008).

As one delves into the more technical aspects ofa reinsurance contract, the term “bordereau” of-ten comes up. The uninitiated may immediatelyrecoil from a word like bordereau, but thosewho have been around the block know that abordereau is just a list or report. But is it just alist?

Bordereau Defined

The venerable Robert W. Strain, whose final re-insurance and contract wording training coursewas conducted in July this year, defines bor-dereau as follows:

Furnished periodically by the reinsured, a de-tailed report of reinsurance premiums or rein-surance losses. A premium bordereau containsa detailed list of policies (or bonds) reinsured un-der a reinsurance treaty during the reportingperiod, reflecting such information as the nameand address of the primary insured, the amountand location of the risk, the effective and termi-nation dates of the primary insurance, theamount reinsured and the reinsurance premiumapplicable thereto. A loss bordereau contains adetailed list of claims and claims expenses out-standing and paid by the reinsured during thereporting period, reflecting the amount of rein-surance indemnity applicable thereto. Bor-dereau reporting is primarily applicable to prorata reinsurance arrangements and to a largeextent has been supplanted by summary report-ing.

Strain, Robert W., ed. Reinsurance ContractWording. Athens, TX: Strain Pub, 1992. TheIRMI.com Glossary definition of bordereau is:“A report providing premium or loss data withrespect to identified specific risks. This report isperiodically furnished to a reinsurer by the ced-ing insurers or reinsurers.” A single report or listis a bordereau. When describing more than onebordereau, add an “x” after the “u” to make theterm plural: “bordereaux.”

Why Bordereau?

The word “bordereau” derives from the middleFrench word “bordrel” and from the old Frenchword “bort,” which means edge or margin.Merriam-Webster’s shows the first known usearound 1858, but A Treatise on the Law ofPrincipal and Agent, Chiefly with Referenceto Mercantile Transactions (Paley, William. 3rded. New York: Banks, Gould, 1847) mentionsbordereau in the context of a statement ormemorandum listing the details of negotiable in-struments. Earlier uses can also be found if yousearch the Internet or hang out in dusty cornersof business libraries.

Interestingly, the errors and omissions clausefound in many reinsurance contracts was devel-oped in the time when all information receivedby the reinsurer was presented on comprehen-sive bordereaux. The errors and omissionsclause was created to ensure that coverage wasprovided even though an item was inadvertentlyleft on a bordereau. Salm, Robert F. “Reinsur-ance Contract Wording.” In Reinsurance. Ath-ens, TX: Strain Pub, 1980. See our ExpertCommentary, “When Errors Occur in a Rein-surance Relationship” (December 2002).

Bordereau is just one of many terms of art usedin the reinsurance industry. Terms of art are of-

https://www.irmi.com/articles/expert-commentary/follow-the-fortunes



https://www.irmi.com/articles/expert-commentary/sorting-out-the-reinsurance-contract-morass

https://www.irmi.com/articles/expert-commentary/sorting-out-the-reinsurance-contract-morass

https://www.irmi.com/articles/expert-commentary/reinsurancese-time-for-a-change

https://www.irmi.com/articles/expert-commentary/when-errors-occur-in-a-reinsurance-relationship

https://www.irmi.com/articles/expert-commentary/when-errors-occur-in-a-reinsurance-relationship

https://www.irmi.com/online/insurance-glossary/terms/b/bordereau.aspx


ten used to set a particular industry or profes-sion apart from others by using jargon that hasa “special” meaning only understood by thoseworking in that industry or profession. As Pro-fessor Kingman Brewster Jr. said, “[i]ncompre-hensible jargon is the hallmark of a profession.”As with most terms of art, “bordereau” wasused instead of report or list by reinsurance pro-fessionals and became common usage in the in-dustry in the 1800s.

Types of Bordereaux

The term bordereau is used to describe mostlists or reports of premium or losses requiredunder the reinsurance contract from the rein-sured to the reinsurer. In the facultative con-text, where an individual risk is reinsured, abordereau is not necessary. The premium re-port is the reinsurance premium paid for thefacultative certificate for that individual risk.On the loss side, typically there is individualloss reporting. But if a facultative certificategenerates multiple losses emanating from anindividual risk, monthly or quarterly reportslisting all claims and all payments on claims at-tributable to that single risk may be deemed abordereau.

In the treaty context, a premium bordereau ismerely a detailed report of the premiums ced-ed from each of the underlying policies subjectto the proportional reinsurance treaty. Typical-ly, the premium bordereau will set out policy-level detail, including the gross premium, thebrokerage if any, and the ceded premium,along with basic details for each policy cededto the treaty. The premium bordereau is alsothe initial method by which the reinsurer findsout the exact details of the business being writ-ten by the reinsured and assumed by the rein-surer.

Typically, the reinsurance contract will specifythe reporting requirements for the periodic pre-mium bordereau. Many reinsurers are now stan-dardizing the format for these bordereaux andaccepting them electronically either in a propri-etary format based on the reinsurance account-ing system being used or in a common formatlike Excel. Certain statistical organizations andindustry compilers of information in certainmarkets have standardized electronic bordereaureporting.

The premium bordereau typically goes directlyto the reinsurer’s accounting function so thatthe ceded premium can be booked. Neverthe-less, it is important for the reinsurer to examinethe premium bordereau for anomalies in eitherthe premium volume or the risk information be-ing supplied. The premium bordereau alsoserves as an important tool for the reinsurerwhen selecting certain risks for audit should thereinsurer engage in periodic audits of the busi-ness being ceded to the treaty.

A proportional treaty typically will have report-ing requirements for losses, and these oftenmanifest as a loss or claims bordereau. The re-insurance contract will set out the informationrequirements for the loss bordereau. Generally,the loss bordereau will contain risk details suchas the insured’s name, claimant’s name, policynumber, claim number, effective date, date ofloss, loss reserve, expense reserve, and anypaid losses or expenses. The loss bordereau,like the premium bordereau, generally is provid-ed in electronic format and often in a standard-ized design. On a quota share treaty, the lossbordereau is often the only way the reinsurerwill obtain information about the losses beingceded to the treaty unless there are special re-porting requirements for certain risks. Like thepremium bordereau, the loss bordereau will be

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the tool against which the reinsurer will makeselections when doing a claims audit.

Reinsurance Contract Requirements

Not every reinsurance contract requires premi-um bordereau reporting. Very often, reportingclauses require summary accounting informa-tion rather than the individual risk detail typical-ly found in bordereau reporting. For example, areporting clause may provide simply as follows:

The Company shall render a monthly ac-count within __ days after the end of the pe-riod. This account shall summarize premi-ums, return premiums, allowances forcommissions, losses paid, loss adjustmentexpenses paid, and salvage recovered. Theaccount shall also reflect the balance due byeither party.

These monthly or quarterly reports are merelyaccount statements summarizing the businessunder the treaty and do not provide policy-lev-el detail. Where the reinsurance contract doesnot prescribe detailed bordereau reporting, thereinsurer must audit periodically to test thebusiness being ceded and to ensure compli-ance with the terms of the reinsurance con-tract.

Where bordereau reporting is required, the rein-surance contract will express the detailed infor-mation required. For example:

The Company shall furnish the Reinsurerwith the following:

1. Bordereau within 30 days after the lastday of each month, payable within 60days after the last day of each month.

The bordereau is to include the followingitems:

A. Name of InsuredB. Policy NumberC. Effective/Expiration DatesD. Type of Transaction (New, Renewal,

Endorsement, or Cancellation)E. Policy LimitF. PremiumG. Ceding CommissionH. Net Premium

Conclusion

Although terms of art and industry jargon areoff-putting to many, industries like the reinsur-ance industry are littered with these expressionsand words. Yet, words like bordereau, once themeaning is known, are no longer mysteriousand are easily understood and put to commonuse. ❒

Reinsurance Contract Wording Revisited

Always read the contract—at least that is whatthe experts say and best practices advise. Thetrouble with that sage advice is that sometimesthe contract is not as clear as it could be.

Ambiguities, as we have discussed before, see“Adventures in Contract Wording: The Effect of

https://www.irmi.com/articles/expert-commentary/effect-of-ambiguous-reinsurance-contract-language


Ambiguous Reinsurance Contract Language,”lead to problems and sometimes disputes.

Who Has the Burden of Proof?

When a contract dispute goes to court over anambiguity, one party has the burden of provingits case. The same is true in reinsurance arbitra-tions, but the rules are more relaxed, and mostarbitrators don’t sweat the burden of proof is-sue. Nevertheless, the parties need to put forthwhat they can to prove their view of how thecontract should be interpreted.

Typically, the plaintiff or the petitioner has theburden of proof. When the issue is proving theexistence of a contract, the burden is on theplaintiff to show that there is, in fact, a contractbetween the parties. In the reinsurance context,things are no different. The party seeking to re-cover under the reinsurance contract typicallyhas the burden of proof.

If a ceding insurer is seeking to collect reinsur-ance recoverables from an assuming insurer, theceding insurer has to prove that there is a realcontract between the parties and that the factsand circumstances demonstrate that the pay-ment is required under the contract. Assumingcredible and sufficient proof is provided, orthere is no issue about whether the parties en-tered into a real contract, then the ceding insur-er must prove that it paid an underlying claim orexpense that comes within the reinsurance con-tract and that a proper billing was delivered tothe assuming reinsurer in a timely manner.

Very often the dispute is not about the billing it-self but whether the payment was a proper pay-ment under both the underlying insurance con-tract and the reinsurance contract. Again, in thefirst instance, the ceding insurer has the burden

to show that the payment was made under apolicy that is reinsured by the reinsurance agree-ment and that the payment was proper withinthe terms and provisions under both contracts.The burden then shifts to the assuming insurerto prove that payment was improper or thatthere is some other basis to refuse payment un-der the contracts.

In direct insurance disputes, it is well knownthat the insurance company seeking to avoid aclaim payment has to prove that an exclusion tocoverage applies. All the policyholder has toprove is that there is an insurance contract andthere is a claim that falls within the coveragegrants of the contract. It is the insurance com-pany’s burden to prove that an exclusion pre-cludes coverage.

Similarly, in a reinsurance dispute, where the as-suming insurer is claiming an exclusion underthe reinsurance contract (or otherwise) applies,the burden falls on the party seeking to get outof the contractual obligation—the assuming in-surer—to prove facts to show that payment isnot required.

Where one party seeks to terminate the reinsur-ance contract, the party claiming the right toterminate has the burden to prove that termina-tion is permitted and appropriate under theterms and provisions of the reinsurance agree-ment. This is true even if, for example, the ced-ing insurer brings an arbitration seeking an arbi-tration award declaring that the assuminginsurer’s attempt to get out of the contract bytermination is ineffective and a breach of the re-insurance agreement. Because the assuming in-surer is looking to avoid a contractual obliga-tion, it becomes the assuming insurer’s burdento prove that termination is permitted under thereinsurance contract.

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https://www.irmi.com/articles/expert-commentary/effect-of-ambiguous-reinsurance-contract-language

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How To Prove the Contract

In most cases, there is no real dispute about thecontract. In court, the plaintiff will have to showthrough business records and appropriate testi-mony that there is a contract. Alternatively, theparties may stipulate to the existence of thecontract.

In a reinsurance arbitration, the parties typicallyput the reinsurance contract in as an exhibit tothe prehearing briefs and use the contractthroughout the proceeding. In most cases, thearbitration panel will ask the parties to providethe reinsurance contract to the panel at the ear-ly stages of the arbitration.

Because reinsurance disputes can involve multi-ple reinsurance contracts with multiple amend-ments and attachments, and ones that are de-cades old, coming up with an agreed-uponcontract set is not always easy. The older the re-insurance contract, the more likely it is that itwill be missing amendments or schedules orthat it will be unsigned. But, unless there is a re-al dispute about the existence of the reinsurancecontract or a particular amendment, small er-rors or missing documents are not usually prob-lematic.

Where there is a real dispute about whether theparties entered into the contract, then the pro-ponent of the contract will have the task of lo-cating enough evidence to convince the arbitra-tion panel that the contract did come intoexistence. This might require archive searchesand assistance from the reinsurance intermedi-ary if one was used to place the reinsurance.

To prove the contract, there will need to beenough documentary evidence and testimonyto show an offer and acceptance, and sufficient

terms and conditions to be able to understandhow the contract operates. Proof might befound in the underlying insurance contract ifthe reinsurance was facultative. Alternatively, itmay be pieced together from correspondence(today, emails; back in the day, facsimiles orcables).

Incorporated Terms

Many contracts expressly incorporate terms andprovisions from other contracts or documents.Reinsurance contracts may do this as well. Thismay complicate determining the meaning ofspecific terms and provisions of the contract.Ambiguities can easily arise from incorporatedwording.

A facultative certificate, which is typically ashort form contract, may incorporate the termsand conditions of the underlying insurance poli-cy it reinsures. Many reinsurance contracts ex-pressly state that the reinsurer must follow theform of the underlying contract. This is particu-larly true in reinsurance structures that aremeant to be back to back with the underlying in-surance policy.

An excess-of-loss reinsurance treaty might in-corporate the terms and conditions of the un-derlying reinsurance contract that reinsures thelower limits of the underlying policy. For exam-ple, if a direct insurer issues a primary policyfor $1 million and a following form excess pol-icy for $2 million excess of the underlying $1million primary policy, the direct insurer—nowthe ceding insurer—may structure its reinsur-ance to follow the underlying pattern. It maypurchase a facultative certificate for a portionof the primary policy and another, followingform facultative certificate for a portion of theexcess policy.


Another example of incorporation in the rein-surance context might occur is where the as-suming insurer buys its own reinsurance andretrocedes part of its assumed risk to anotherassuming insurer (a retrocessionaire). In thatcase, the retrocessional contract may attach orincorporate the underlying reinsurance contract.

For an incorporation to be effective, the contractmust make clear reference to the incorporateddocument and describe it in terms that clearlyidentifies the document. Some contracts go fur-ther than merely referring to another document.Some contracts expressly attach the other docu-ment. With a provision expressly attaching an-other document and with the document actuallyattached, there can be no doubt about the otherdocuments applicability. But how it works in aspecific context may not be as clear.

Dual Incorporation

Another way to make it clear that the terms ofanother document are incorporated is not justto attach it but to state expressly that all theterms and provisions of the other document areapplicable to this contract as if those terms werecontained in this contract. This has been calleddual incorporation by some courts. This hasbeen used in some reinsurance contracts, and atleast one court that has reviewed dual incorpo-ration provisions in a retrocessional context hasstated that it was sufficient to allow the underly-ing contract’s arbitration provision to apply tothe retrocessional contract.

The dual incorporation provision emphasizesthat not only is the referenced document at-tached and made a part of the contract but thatall the terms and provisions of that documentare applied to this contract as if those terms andprovisions were contained in this contract.

Often these provisions state that there is a limitto incorporation. Obviously, there are termsand provisions of the contract that are differentfrom the underlying document, so these provi-sions provide that the incorporation applies ex-cept as amended by the contract.

Does Incorporation Solve the Ambiguity Problem?

Incorporating terms and provisions from anoth-er document is helpful in clarifying how to inter-pret the main contract. But if the main contractdoes not clearly specify what provisions takeprecedence when there seems to be an overlap,then ambiguities arise.

A provision that says, “except as amended bythis agreement, all terms and provisions of theother agreement apply” is only helpful if “thisagreement” specifies what it is amending fromthe other agreement. When it does, the mainagreement will have language such as “section2 of the referenced document is amended as fol-lows.” Without that language, the parties areleft to fight over conflicting provisions.

While the general rule is that a later-signed doc-ument’s terms will prevail and a more-specificprovision will prevail, it is not always very easyto make the distinction. For example, if an in-corporated reinsurance agreement has an in-spection of records clause and the retrocession-al agreement that incorporates the underlyingagreement has its own inspection of recordsclause, which one prevails if there is a disputebetween the retrocedent and the retrocession-aire?

The answer may be that the provisions have tobe read together and reconciled; it all dependson the language.

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Conclusion

There is no doubt that reinsurance contractwording has improved markedly in recent years.Nevertheless, most reinsurance disputes involveolder contracts, and some of those contractshave ambiguities. While the burden of proof of-ten rests with the contract’s proponent wherethe other party is claiming relief from compli-ance, the burden of proof generally shifts.

Incorporated wording adds complexity to deter-mining the meaning of specific terms and provi-sions of the contract. Lack of clarity may causeambiguities to rise if it is not clear what provi-sions of the main contract control over the in-corporated provisions.

The bottom line is the contract needs to be readin its entirety and in the context of the structureof the agreement, any incorporated terms andprovisions, and with consideration of the cus-toms and practices of the industry. ❒

Adventures in Contract Wording: The Effect of

Ambiguous Reinsurance Contract Language

Sloppy contract drafting breeds disputes, dis-putes result in litigation, and it is dangerous in-deed to leave it to the courts to determine theprovisions of a reinsurance contract. This articleexamines some of the problems that can occur

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because of imprecise reinsurance contract lan-guage and what can be done to avoid this sce-nario.

To some, reinsurance contracts seem at oncearcane and boilerplate—arcane because reinsur-ance terminology goes back hundreds of years,and boilerplate because “standard” clauses ap-pear in contract after contract, year after year.Like all contracts, however, it is crucial that a re-insurance contract set forth the intent of theparties clearly and precisely to avoid legal dis-putes years later.

High quality cedents and reinsurers have con-tract wording specialists whose job it is tomake sure that the wording for that particularreinsurance contract properly expresses theparties’ intent. Sometimes, however, becauseof the press of business, the volume of reinsur-ance contracts renewing at the same time, orby the use of reinsurance intermediaries toprepare draft contract wordings, reinsurancecontracts are drafted using the old cut-and-paste method. Clauses may be carried overfrom sample or older contracts that may haveno relevance to or meaning in the contract be-ing drafted. Under these conditions, the intentof the parties may not match the contractwording. And if the losses exceed expecta-tions, a dispute will arise.

Sloppy contract drafting breeds disputes, anddisputes distract cedents and reinsurers from thebusiness at hand. Ambiguities in reinsurancecontracts also may result in a judicial interpreta-tion of the contract that is contrary to the cus-tom and practice in the industry or one that wasnever even contemplated by the parties. Clarityin reinsurance contract drafting, therefore, is ex-tremely important to a long and stable relation-ship between a cedent and its reinsurers.


Ambiguity Breeds Disputes

There have been a number of reinsurance dis-putes over ambiguous reinsurance contractterms. For example, in one case, a disputearose concerning whether the cedent’s use ofquota share reinsurance to cover part of a lossthat came within the cedent’s retention was abreach of the cedent’s net retention warranty inthe reinsurance agreement [Commercial UnionIns. Co. v Seven Provinces Ins. Co., 217 F3d33 (1st Cir 2000)]. The facultative certificate is-sued by the reinsurer required that the cedentretain $225,000 out of the $450,000 excess of$50,000 amount reinsured. The retention,however, could be reduced by “any general ex-cess loss or excess catastrophe reinsurance.”

The language used in the net retention clause wasextremely difficult to follow (and is not worth re-peating here). The cedent took the position that itproperly reduced its retention by using its generalquota share treaty to cover part of the loss with-out a proportional reduction in the amount re-quired to be paid by the facultative reinsurer.

The court found that the net retention provisionwas ambiguous and allowed expert testimony tohelp clarify whether the quota share treaty qual-ified as a general excess of loss reinsurance con-tract. Ultimately, the courts agreed with the ce-dent’s expert and held that the use of the quotashare treaty to reduce the cedent’s net retentiondid not violate the net retention clause.

All of this, of course, could have been avoided ifthe net retention clause was written more pre-cisely. The ambiguity, according to the court,was the phrase “general excess of loss reinsur-ance contract,” which the court did not find tobe a term of art in the reinsurance industry aswas the phrase “excess of loss reinsurance.”

Had the parties made clear in the contract pre-cisely what reinsurance protection the cedentcould purchase without violating the net reten-tion warranty, this issue would not have beenraised in the dispute. While it is far from clearthat the use of quota share reinsurance by thecedent violated the net retention warranty, onehas to wonder how the court could equate “gen-eral excess of loss reinsurance contract” with aquota share reinsurance contract.

Another issue arising out of the perceived ambi-guity in reinsurance contract wordings is wheth-er declaratory judgment expenses are coveredunder reinsurance contracts. This issue has gen-erated case law and significant industry com-mentary because of its economic impact on en-vironmental and other long-tail, continuousexposure types of claims.

In Affiliated FM Insurance Co. v ConstitutionReinsurance Corp., 416 Mass 839 (1994), theMassachusetts Supreme Court found the lan-guage in the facultative certificate unclear onwhether the parties intended the contract to in-clude litigation expenses for declaratory reliefbrought by an insured against its insurer to de-termine coverage. The word “expenses” was atthe crux of this dispute. The court held that be-cause “expenses” was a word with broad im-port and no fixed definition, it was ambiguousin the context of the facultative certificate. Hadthe certificate made clear how declaratory judg-ment expenses would be handled, there wouldhave been no dispute.

Conflicts between Contract Provisions

Other disputes have arisen because of a per-ceived conflict between the arbitration and ser-vice-of-suit clauses in reinsurance treaties. The

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typical arbitration clause makes arbitration theexclusive means of dispute resolution betweenthe cedent and the reinsurer. Most reinsurancetreaties—particularly ones involving internationalreinsurers—also contain a service-of-suit clause,which provides that the reinsurer shall submit tothe jurisdiction of any U.S. court at the request ofthe cedent if the reinsurer fails to pay.

Some reinsurers have argued that the disputemust go to court because the service-of-suitclause overrides the arbitration clause. Most re-cently, an Ohio federal court rejected this argu-ment and found that the service-of-suit clausewas meant to apply to litigation to compel arbi-tration or to confirm or vacate an arbitrationaward, and did not override the broad arbitra-tion clause in the reinsurance treaty [CreditGen. Ins. Co. v John Hancock Mut. Life Ins.Co., No. 1:99 VC 02690, 2000 U.S. Dist.LEXIS 9003 (ND Ohio May 30, 2000)].

The ambiguity here arises not from the lack ofclarity of particular phrases, but because provi-sions in the same contract appear to conflict.While the Ohio federal court did not find a con-flict, other courts have held that the service-of-suit clause overrides the arbitration clause wherethe arbitration clause is not broad. Often, con-flicts between contract provisions occur whenolder agreements are marked up and edited. Ifcare is not taken to make sure that only the rele-vant clauses are present and that no internalconflicts exist, disputes will arise, and courtsmay interpret the contract in a way the partiesdid not contemplate.

The Dangers of Short-Form Contracts

Another area where ambiguities arise is whenthe reinsurance contract is merely a slip policy.

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A slip is a short-form method of documentingthe main terms and conditions of a reinsurancecontract in advance of the preparation of thefull contract wording. The slip itself stands as anenforceable contract should the formal contractnot be drafted. While in most cases a formal re-insurance treaty will be signed by the parties,certain reinsurance markets rely on slips andcover notes as the final expression of the par-ties contractual arrangements.

Slip policies are fraught with potential ambigu-ities. If not drafted carefully, they often refer tounderlying wordings that might not exist or ref-erence specific forms that are no longer in use.We have seen slips in loss portfolio reinsurancecontracts that refer to the arbitration clause “asin the original” when there is no “original” to re-fer to. We have seen other slips where the par-ties express the reinsurance limits only, withoutclarifying the cedent’s retention.

These drafting lapses lead to disputes, whichare more difficult to resolve because of the am-biguities in the contract. While some courtshave no trouble enforcing an arbitration provi-sion merely based on the words “arbitrationclause” in a slip [Allianz Life Ins. v AmericanPhoenix Life & Reassurance, Civ. No. 99-802(DWF/AJB), 2000 U.S. Dist. LEXIS 7216 (DMinn March 28, 2000)], it is dangerous indeedto leave it to the courts to determine the provi-sions of a reinsurance contract.

Concluding Thoughts

The law of contracts applies to reinsurance con-tracts with equal force. While the rules of con-tract interpretation allow the use of extrinsic ev-idence to determine the parties’ intent should aprovision be found ambiguous, resorting to ex-trinsic evidence is unnecessary if the contract is


devoid of ambiguity. It is better and less expen-sive to be clear and precise when drafting a rein-surance contract then to await an expensive ar-bitration or litigation to find out what a thirdparty thinks the parties originally intended. ❒

The Interplay between Fronting and MGA

Arrangements

Insurance and reinsurance programs take onmany structures. Some are straightforward tradi-tional reinsurance arrangements. For example, aceding insurer produces a book of businessthrough its agency force or through independentbrokers and underwrites the business through itsunderwriting staff. Claims are then handled bythe ceding insurer’s claims department. A rein-surer or group of reinsurers contracts with theceding insurer to provide quota share or excess-of-loss reinsurance protection.

Other structures involve business produced bythird parties. These third parties are often non-risk-bearing organizations that contract with theceding insurer to produce a certain class or lineof business that is then subject to reinsuranceprotection. A different type of structure includesa ceding insurer that bears very little if any riskof loss and reinsures all or almost all of the riskto the reinsurer, which is the real party in inter-est and assumes the economic risk of loss forthe business written. These are called frontingarrangements. Essentially, the ceding insurer

agrees to write the business but then lays off allor most of the risk to the party that really wantsto assume those risks.

Sometimes the structure of the deal combinesthe use of a third-party managing agent thatproduces and underwrites the business for aceding insurer, which in turn acts as a frontinginsurer for a reinsurer. These hybrid structuresconflate the issues parties often confront whendealing with managing agency and fronting ar-rangements.

In “The Trouble with Giving Away the Pen”(June 2001) and “Up-Front about Reinsurance”(January 2004) reinsurance commentaries, wediscussed some of the issues that may arisewhen contracting with a managing agent andthe various rationales for creating a fronting ar-rangement. This commentary will discuss theinterplay between the two.

Overview of Insurance Business Production

There are many ways insurance business is pro-cured, produced, underwritten, and ultimatelyreinsured. Because there are many specialtylines of insurance, some of which are esotericor highly specialized, very often they are under-written by specialty brokers or other third par-ties that contract with insurance companies toprovide the insurance policies necessary to in-sure that business risk. Sometimes the insurer isactively engaged in the business and partici-pates both economically and with the under-writing and claims handling. Sometimes the in-surer merely acts as a pass-through or frontingcompany for the business, which is ultimatelyreinsured to a specialty reinsurer created by theproducer or an unaffiliated reinsurer that be-comes the real party in interest.

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The analogy is roughly similar to a market-mak-er in the securities world. Certain specializedstocks are traded between a few specialty secu-rities brokers who create a marketplace for thesecurities for that industry. In insurance, certainbusiness is sourced and underwritten only byspecialist brokers. Because these brokers typi-cally are not risk-bearing entities, they need tofind an insurance company to supply the policyon which the business will be written and a re-insurer or a group of reinsurers willing to as-sume the risk associated with the policies beingwritten. It is not uncommon for brokers to de-velop new coverages and insurance products fornew risks and then reach out to the risk-bearinginsurance market for insurers and reinsurerswilling to participate in the new underwritingventure.

The Interplay between the Fronting Company and the Agent

The producer/agent of the business will typical-ly contract with an insurance company as amanaging agent to produce the insurance busi-ness on the fronting insurance company’s poli-cies. If an agent is producing and underwritingbusiness on behalf of an insurance company,most states’ insurance laws require that anagency agreement must be entered into be-tween the agent and the insurer. The regulatoryclimate for agents changed in the 1980s be-cause of perceived abuses by some unscrupu-lous agents. These agency agreements haveprovisions that purport to protect the insurerfrom abuses by an underwriter who that has noskin in the game.

If it is the producer/agent who is sourcing andunderwriting the business (and owns the renew-als as many managing agents do), it is likelythen that the producer will look for an insur-

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ance company partner or for a fronting insurerthat will allow the producing agent to write thebusiness on that insurer’s policies. Where theinsurer is not a partner in the true sense (doesnot want to keep the business net), a frontingarrangement is generally created whereby theinsurer is merely a pass-through for the busi-ness. The insurance policies produced are ulti-mately reinsured by the insurer that has the realinterest in the business.

The insurer with the real interest in the businessmay be a true independent partner with theproducing agent or may be a captive risk-bear-ing insurer created by the producing agent. Veryoften, the producer-owned reinsurers of thesefronting arrangements are incorporated out-side the United States, where the capital andregulatory requirements have lower barriers toentry.

In one scenario, the risk-bearing entity is a rein-surer ultimately owned by the producing agent.In this situation, it is in the producing agent’sbest interest to produce high-quality business inwhich the fronting insurer will receive its front-ing fee and not have any real risk of being stuckwith a book of poorly performing business withno live reinsurer.

In another scenario, the risk-bearing entity isan independent insurer acting as a reinsurer. Inthis situation, it is often the case that the pro-ducing agent’s only form of compensation isthe fee earned from producing and underwrit-ing the business plus any profit sharing on theprofitability of the entire book of business.Here, the independent reinsurer must be vigi-lant to ensure that the producing agent is pro-ducing quality business and not just rampingup the volume to earn a large commission andthen disappear.


The reinsurer cannot rely on a fronting insurerto monitor the managing agent where thefronting insurer is not retaining any risk. Thefronting insurer is merely collecting a frontingfee as the business is all being reinsured to thereinsurer. If the fronting insurer was broughtinto the deal by the managing agent, there iseven more reason to monitor the businesscarefully.

What Can Go Wrong?

At the outset, it is important to be clear thatmost managing or producing agents do an ex-cellent job in their specialty areas and do theirvery best to produce high-quality and profitablerisks. Nevertheless, where insurance companiesallow others to do the producing, underwriting,and claims handling, things can go very wrong.

In a recent case, an insurance company actingas a reinsurer became the real party in interestto a fronting deal created and produced by amanaging agency and its affiliates. Essentially,the agent allegedly diverted millions of dollars offunds from the reinsurance arrangement to itsaffiliates and then to its principals. See LincolnGen. Ins. Co. v. U.S. Auto Ins. Servs., Inc.,2015 U.S. App. 8172 (5th Cir. 2015).

In this case, the managing agency producedand underwrote auto insurance policies for athird-party fronting company. The reinsurer re-insured 100 percent of the business written.The agency agreement was between the front-ing company and the managing agent. Themanaging agent issued the policies, collectedand handled the premiums paid, and handledthe claims. Although there was a premium trustaccount, the managing agent had the power tomanage the money and to retain its commissionbefore depositing any funds into the trust ac-

count. The managing agency engaged an affili-ate to handle the claims.

The deal was structured based on a target lossratio. After paying a small fronting fee from thepremiums collected, the managing agent re-ceived 20.6 percent of the remaining premiumas its compensation. The reinsurer received 10percent of the premiums assuming the loss ratiotarget was not exceeded. The balance wouldpay losses, and if the loss ratio was lower thanthe target, the managing agent would receiveadditional commission.

We can stop the narrative here because it ispretty clear what can go wrong. If the loss ratiowere somehow manipulated, the reinsurerwould not get its 10 percent, but the managingagent would get its 20.6 percent off the top. Al-so, if the funds meant to be put aside to coverthe target loss ratio were siphoned off, therewould not be enough money to pay the losses.

In this case, the managing agent allegedly en-tered into contracts with other affiliates andpaid those affiliates $50 million, which was nev-er put aside for the anticipated losses. Addition-ally, the managing agent allegedly unilaterallychanged the formula used to calculate its com-missions and artificially depressed the loss ratioto inflate its own commissions. When the lossesfinally came in, the trust fund was depleted andthe reinsurer had to fund all the claims.

Lessons Learned

Managing and monitoring a managing agent is ab-solutely critical to avoiding an unintended loss. Ifthe real party in interest is a reinsurer behind afronting arrangement, the reinsurer must audit andmonitor the managing agent to make sure that thepremiums are being allocated and deposited cor-

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rectly and that the target loss ratio is being met.The right to audit must be carefully crafted into thereinsurance agreement where the managing agen-cy agreement is solely between the fronting cedinginsurer and the managing agent.

Although modern managing agency agreementsprovide statutory and contractual protectionsagainst managing agency abuses, there is no sub-stitute for boots on the ground (or at least virtualboots accessing premiums and claims systems inreal time). It is important for the real party in inter-est to examine any third-party service contractsentered into (or better, proposed to be entered in-to) by the managing agent to avoid self-servingcontracts with affiliated companies that merely in-crease the fees paid to the managing agent.

Frequent reporting, auditing, and spot-checkingare critical to maintaining a healthy managingagency arrangement that works for all parties.Where there is a fronting insurer involved, it iscritical to make sure that the reinsurer—the realparty in interest—has all the rights to receive re-ports and monitor and audit the entirety of thefronting and managing agency arrangement. ❒

If It Looks Like a Claim, and Sounds Like a Claim, Is It a

Claim for Reinsurance Purposes?

This article explains why a claim to an insur-ance company may not be a claim to a reinsur-

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er, depending on the nature of the reinsuranceprovided.

Claims are a natural and expected outcome ofany insurance relationship. This is, of course,true in reinsurance relationships as well. But is aclaim for insurance purposes a claim for reinsur-ance purposes? The answer is, it depends.

Traditional Insurance Company Claims Responsibilities

Under a traditional third-party liability insur-ance contract, the insurance company has theduty to defend the insured against any claimsbrought against the insured that arguably fallwithin the scope of the insurance contract. Ad-ditionally, the insurance company has a dutyto indemnify the insured for payments the in-sured must make to compensate claimants fordamages sustained as a result of the insured’sactions that are covered by the insurance poli-cy. Courts have held that the duty to defend isbroader than the duty to indemnify, so thatloss adjustment expenses incurred in defendingagainst a claim may be the largest loss costwhere there is a question as to whether theclaim is covered by the policy.

Similarly, under a traditional first-party insur-ance contract, the insurance company is re-sponsible to indemnify the insured for all dam-ages sustained to covered property or life orhealth risks that come within the scope of thecoverage of the insurance policy. The insurancecompany has a duty to investigate and adjustclaims in a timely and good faith manner andgenerally cannot disclaim coverage without pro-viding very specific reasons.

All insurance policies contain notice provisionsby which the insured must notify the insurance


company of any claims brought against the in-sured. Many policies require that the insuredprovide notice of any potential claim, even if theinsured has yet to receive a demand letter orsummons and complaint. Timely notice usuallyis required, and there are numerous cases dis-cussing the consequences of the failure of an in-sured to notify its insurer of a claim in a timelymanner.

Generally, when an insurance company re-ceives notice of a claim or potential claim, itsets up a claim file and will post an initial re-serve for that claim. Depending on the insur-ance contract, the insurer likely will engagecounsel to defend the insured in a liability case(or accept the insured’s selection of counsel)and may engage separate coverage counsel ifthere is a question about whether the policycovers the claim. The claims examiner will in-vestigate the claim, often with the assistance ofprofessional adjusters, and will negotiate anysettlements. The insurance company’s claimreserve may change over time as more infor-mation is obtained and as the claim adjuster’sevaluation of the claim changes.

Reinsurance Claims Responsibilities

Generally, reinsurers have no duty to defend,do not appoint defense counsel for the insured,and are merely required to reimburse their rein-sureds for payments made by their reinsuredson the business that is reinsured. The triggerfor payment by a reinsurer is often actual pay-ment by the reinsured of a claim either in set-tlement or as a judgment. Reinsurance con-tracts are contracts of indemnity, andgenerally, unless the insurance company haspaid or is required to pay, the reinsurer has noobligation to pay the claim.

Most reinsurance contracts grant the right, butnot the duty, of the reinsurer to associate in thedefense of a claim by retaining its own counselto participate in the case. This is a right that israrely exercised, as reinsurers prefer to preservethe lack of contractual privity (direct contractualrelationship) between reinsurers and the under-lying insureds to avoid direct actions by insuredsagainst reinsurers.

Reinsurers also have claim departments, butthey are not generally involved in the day-to-dayadjustment of claims, and are much smallerthan the claims departments of insurance com-panies. The reporting of claims to a reinsurerand whether that report is considered a claim bythe reinsurer will depend on the terms of the re-porting clause of the reinsurance contract.

On proportional or quota share reinsurancetreaties, generally claims are reported in bulk ona periodic accounting basis. In these circum-stances, the reinsurer will not know about indi-vidual claims unless the reinsurer exercises itsright to audit the reinsured and examine theclaims files itself. As these claims are reportedon an accounting basis, they generally are han-dled by accounting staff and not by claims ex-aminers at the reinsurer.

On excess-of-loss reinsurance treaties, claimsgenerally are reported on a periodic accountingreport or bordereaux, which provides claim lev-el detail about individual claims over a certainattachment point. For example, if the treaty is$500,000 excess of $250,000, claims thatbreach the $250,000 attachment point will bereported to the reinsurer for payment. Depend-ing on the reporting requirements of the treaty,smaller claims may never be reported to the re-insurer because they will never become the rein-surer’s responsibility.

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On facultative reinsurance, where the reinsur-ance is of a specific policy and risk, all claims af-fecting the reinsured policy will be reported in-dividually to the reinsurer, depending on theattachment point of the facultative certificateand the certificate’s reporting requirements.

Generally, the reporting clause in the reinsurancecontract requires the reinsured to report all claimsto the reinsurer that the reinsured believes will af-fect the reinsurance contract. This generallymeans that if the reinsured reserves a claim foran amount that exceeds the attachment point ofthe reinsurance, that claim should be reported.

Some reinsurance contracts have more specificreporting triggers based on reserves exceeding aspecific amount (e.g., the reinsured shall reportall claims to the reinsurer where the posted re-serve exceeds 50 percent of the limit of liabilitycovered by this contract) or by the nature of theclaim or injury. Each reinsurance contract is dif-ferent and the reporting and claims paymentclauses must be examined carefully to understandwhen claims must be reported to reinsurers.

Reinsurance claims examiners handle a muchlarger number of claims than claims examinersin insurance companies because they are not in-volved in the day-to-day adjustment of theclaims or supervision of defense counsel. Thereinsurer’s claims department will often contactthe reinsured to obtain periodic updates on theclaim, provide input on technical claims issues,and monitor the reinsured’s claim activities forcompliance with the reinsurance contract.

When Is a Claim a Claim for Reinsurance Purposes?

Unless a claim is likely to affect the reinsurance,a reinsurer’s claims department may not consid-

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er the mere report of a claim or incident as a“claim” for its purposes. While the reinsuredand reinsurer are often aligned for claims pur-poses, the reinsurer is only concerned withclaims that are likely to affect its reinsurance andthat are within the scope of the reinsurancecontract.

If a reinsurer is providing excess-of-loss protec-tion for claims in excess of $250,000, a claimof $10,000 will not hit its radar screen. Particu-larly in high frequency lines of insurance, likeworkers compensation or private passenger au-to, reinsurers do not want reports and paper-work on claims that are never going to reachtheir layers. These claims are not claims for pur-poses of reinsurance unless the reinsurancecontract provides aggregate coverage for theseclaims.

Moreover, what may be a claim to the insur-ance company may not be a claim to the rein-surer if the coverage provided by the reinsur-ance policy is not concurrent with theunderlying coverage. For example, if the rein-surance provided is limited to boiler and ma-chinery coverage of an all-risks policy, claimsoutside the specific boiler and machinery cov-erage will not be considered a claim by the re-insurer. It is important for the insurance com-pany’s claims examiners to understand theavailable reinsurance protection and to cedethe losses to the proper reinsurers in a timelymanner.

Timeliness of reporting claims to reinsurers isalso important. Some notice clauses requirereporting within a certain time frame as a con-dition precedent to coverage. Generally, thecourts have found that late notice to a reinsur-er will not excuse payment of the claim by thereinsurer without showing specific prejudice,


but not all courts agree, and it often dependson the notice clause of the reinsurance con-tract.

Cash Calls

Many reinsurance contracts provide for an ex-ception to the normal reporting and paymentof reinsured losses when extraordinary eventsoccur. When a loss occurs of a certain magni-tude, the reinsurance contract may permit theinsurance company to make a special requestto the reinsurer for immediate payment of theclaim, called a cash call, to reimburse the in-surance company for its payment to its in-sured.

A recent example of a cash call is the request bythe property insurers of the World Trade Centerto reinsurers to cover significant immediate pay-ments made to the leaseholder and the Port Au-thority to pay for the immediate needs followingthe collapse of the Twin Towers. While reinsur-ers may dispute aspects of the claim, often cashcalls are paid under a reservation of rights incatastrophic events so that the immediate needsof the insureds and insurers are satisfied withoutfurther disruption or loss.

Conclusion

The claims-handling responsibilities of insur-ance companies and reinsurers are different.Reinsurers are only concerned about claimsthat are likely to affect their reinsurance cover-age and that fall within the scope of that cov-erage. The reinsurance contract provides forwhen an insurance company should report aclaim to the reinsurer. A claim to an insurancecompany may not be a claim to a reinsurer, de-pending on the nature of the reinsurance pro-vided. ❒

Playing the Name Game—An Update on Cut-Through

Clauses

In our March 2001 article, “Cut-Through Provi-sions in Reinsurance Agreements,” we de-scribed the nature of cut-through clauses andsome of the business reasons why cut-throughclauses exist. In this commentary, we take an-other look at cut-through clauses and how theyhave been interpreted by the courts.

Because a reinsurance agreement is a contractof indemnity between a ceding insurer and a re-insurer, a contractual relationship exists only be-tween those two parties. Generally, no privityof contract is enjoyed by the original insured (orreinsured in a retrocessional relationship), as ithas no contract with the reinsurer.

The exception to this general rule occurs whenthe reinsurer and the ceding insurer contractaround the lack of privity between the originalinsured and the reinsurer by express language inthe reinsurance contract. This language in a re-insurance contract is known as a “cut-through”clause. A cut-through clause allows a party thatis not in privity with the reinsurer to have rightsagainst the reinsurer as a part of the agreementbetween reinsurer and ceding insurer.

The Cut-Through Clause

A cut-through clause is generally tailored to re-spond to specific events written into the rein-

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surance contract. It allows the original insuredto take direct action against the reinsurerwhere these specified events prevent the origi-nal insurer from paying the claims of its policy-holder (the original insured). Cut-through claus-es can be particularly useful in situationswhere, to secure business, the ceding insurerneeds to provide extra assurance to its policy-holders. Many large commercial insureds maynot engage an insurer unless they have someassurance that the reinsurer standing behindthe insurer will be liable to the original insuredin the event the ceding insurer is unable fulfillits policy obligations.

Additionally, certain insurance programs arestructured in such a way that the reinsurer is, forall intents and purposes, the real insurer-in-in-terest and the ceding insurer is merely frontingthe deal. This may happen because of licensingissues affecting the reinsurer’s ability to issuepolicies in a given territory, capital constraints,or brand recognition and penetration.

Recent Court Rulings Involving Cut-Through Clauses

While most states recognize the validity of cut-through clauses, some caselaw suggests thatcut-through clauses must be precisely tailored inorder to be effective. Indeed, if any languageproffered as a cut-through clause is not preciselyworded, courts have shown a clear preferenceagainst finding the clause to be a valid cut-through clause.

An excellent example of how the courts inter-pret cut-through clauses is the decision in Juru-pa Valley Spectrum, LLC v. National Indem.Co., 555 F.3d 87 (2d Cir. 2009). In Jurupa, theobligee of surety bonds sued the surety’s rein-surer to collect on the bonds after the surety be-

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came insolvent. The claim arose out of the fol-lowing language in the reinsurance contract:

[T]he parties to this Reinsurance intend thatReinsurer, through the Claims Administrator,shall pay all amounts … due Insureds andother persons as and when due directly onbehalf of the Reinsured….

The obligee argued that this wording necessari-ly implied that the reinsurer had granted cut-through rights to all original insureds against thereinsurer. In affirming the district court, theSecond Circuit Court of Appeals ruled that thisclause did not constitute a cut-through clause.The court stated that “New York law recognizesan exception if the reinsurance agreement con-tains a so-called ‘cut-through’ provision grantingpolicyholders a direct right of action against re-insurers, which is apparent on its face.” Despitethe apparent provision for payment to the origi-nal insured, the court found that the provisionneeded to specifically name those insureds towhich payments would be made.

This seemingly minor difference was deter-mined to be the distinguishing factor betweenthe contract in this case and the contract con-taining substantively similar language that thecourt found to be a cut-through clause in Trans-Resources, Inc. v. Nausch Hogan & Murray,298 A.D.2d 27 (1st Dept. 2002). The courtsaid the language in Trans-Resources includedthe agreement of the reinsurer “to pay directlyto the named insured,” while the languageabove provided that the reinsurer “shall pay allamounts due Insureds.” This latter language,the court held, did not specify to whom the pay-ments will be made.

Moreover, Article 14 of the reinsurance contractprovided expressly that:


[n]othing … expressed or implied,… shall beconstrued to confer upon … any person [oth-er than the parties] … any rights or remediesunder … this reinsurance.

This language, said the court, further supportedthe view that the reinsurance contract did notprovide for a cut-through.

The specificity the Second Circuit sought, whichrequired the reinsurance contract to name thedirect insured to be paid via a cut-throughclause, is an example of the type of detailedconstruction required for any cut-through clauseto be effective. While there are differences be-tween the clauses in Jurupa and Trans Re-sources, this should not take away from the im-portance of careful construction of cut-throughclauses to assure their effectiveness. The court’smessage in Jurupa is clear: particular phrasingof any clause creating additional rights for thirdparties in reinsurance contracts is crucial for thevalidity of the clause, especially if the wording isto be construed to overcome additional lan-guage in the agreement stating that:

[n]othing [herein], express or implied, … shallbe construed to confer upon … any person… (other than the parties hereto or their per-mitted assigns or successors) any rights orremedies under … this reinsurance.

Thus, the issue of specifically naming the in-sured to be paid in the event of insolvency, andnot the disclaimer language, was the primary is-sue resulting in the court’s finding that no cut-through clause existed in Jurupa.

Yet, courts have not backed away from the gen-eral rule that reinsurance contracts can still ef-fectively contract around the traditional tenetthat there is no right of the original insured

against the reinsurer. Rather, the decision in Ju-rupa serves to advance the idea that, to allowthe original insured rights against a reinsurer, aclear intent must be manifest in the specific lan-guage of the contract itself.

In Trans-Resources, the reinsurer attempted touse fairly standard language to avoid an allegedcut-through clause. The reinsurance contracthad a provision stating that the reinsurer “shallhave no obligation to the original insured oranyone claiming under the policy(ies) rein-sured.” The court, however, refused to overlooklanguage in the contract’s cover note obligingthe reinsurer “to pay directly to the named in-sured … with respect to any claim under saidpolicy” and stating that this clause “stipulatesdirect liability and creates a direct proceduralprivity as between the original insured and thereinsurer.”

When you compare Trans-Resources to Juru-pa, it becomes clear that the major differencebetween the wordings of the purported cut-through clauses in both cases is the specificityin which the party receiving the reinsurancepayments was named. The court in Trans-Resources found that a cut-through clause exist-ed because the policyholder (the named insured)was clearly named as the recipient of direct pay-ments from the reinsurer if the ceding insurercould not pay. Although this clause representeda fairly standard “insolvency clause” that isfound in many reinsurance contracts, the deci-sion in Trans Resources indicates the impor-tance of specific construction of cut-throughclauses by expressly naming the policyholderthat will be paid upon the ceding insurer’s de-fault.

The specificity of naming the party to whom di-rect payments will be made is often based on

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statutory requirements. For example, in Penn-sylvania, the statute provides that:

The amount recoverable by the liquidatorfrom reinsurers shall not be reduced as a re-sult of delinquency proceedings, regardless ofany provision in the reinsurance contract orany other agreement. Payment made directlyto and insured or other creditor shall not di-minish the reinsurer’s obligation to the insur-er’s estate except where the reinsurance con-tract provided for direct coverage of anindividual named insured and the paymentwas made in discharge of that obligation.

40 P.S. § 221.34.

This statute formed the basis for the guidelinesestablished by the court supervising the RelianceInsurance Company liquidation in Pennsylvania.See Koken v. Reliance Ins. Co., No. 269 M.D.2001 (Apr. 26, 2002). These guidelines set forththe circumstances under which direct paymentsby reinsurers to insureds would be allowed—es-sentially the rules for determining the validity ofcut-through clauses for reinsurers of Reliance.

In Koken v. Legion Ins. Co., 831 A.2d 1196(Pa. Commw. 2003), the court noted the Reli-ance guidelines were instructive in consideringcut-through clauses in the Legion InsuranceCompany insolvency, but were not binding. InKoken v. Legion, the court addressed severalclaims by several insureds claiming direct accessto reinsurance proceeds. One insured claimedthat the reinsurance contract between the ced-ing insurer and the reinsurer had an express cut-through right. The insolvency clause in the rein-surance contract provided as follows:

… The reinsurance will be payable by the Re-insurers directly to [the cedent], its liquidator,

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receiver, … except (a) where this Agreementspecifically provides another payee of suchreinsurance in the event of … insolvency or(b) where the Reinsurers, with the consent ofthe direct insured or insureds, have assumedsuch policy obligations of [the cedent] as di-rect obligations of themselves to the payeesunder such policies in substitution for [the ce-dent’s] obligation to such payees. Then, andin that event only, [the cedent] … is entirelyreleased from its obligation and the Reinsur-ers will pay any loss directly to the payees un-der such policies.

The court found that the reinsurer functioned asthe direct insurer (it was a fronting situation) andthat provision (b) was included in the reinsur-ance contract to provide the insureds direct ac-cess to the reinsurers in the event of the cedinginsurer’s insolvency. The rationale behind thecut-through provision in the insolvency clause,as expressed by the court, was to give the in-sureds comfort that if something happened tothe insurer, the insureds would be able to obtaincoverage directly from the reinsurers.

In rejecting the rehabilitator’s attempt to givevery narrow meaning to the exception provisionin § 221.34, the court in Koken v. Legion stat-ed that it is difficult to make any generalizationsabout cut-through endorsements and how theyought to appear. Expert testimony cited by thecourt acknowledged that cut-through clausesare distinctive and vary depending on the juris-diction and the intent of the parties.

Conclusion

It is clear from the ruling in Jurupa that theprecise wording of a cut-through provisionmust clearly indicate its function in allowing athird party to the reinsurance contract the


right to direct access to the reinsurance, as wellas sufficiently naming the party to who pay-ment will be made. Yet, jurisdictional differenc-es, statutory distinctions, and the intent of theparties may allow for enforcement of a cut-through clause that does not meet the Jurupastandards. If what the parties intend is that theunderlying insured should have direct access tothe reinsurance should the ceding insurer be-come insolvent, then the provision should bedrafted precisely and clearly to effect that in-tent. ❒

Allocation in the Mind of the Ceding Insurer

When a ceding insurer resolves a long-tail claimor series of long-tail claims (e.g., asbestos)through a settlement, policy buy-back, commu-tation, or some other mechanism (which couldinclude a judgment after trial), what should it,must it, or can it consider when deciding how toallocate the settlement to multiple policies overmultiple years?

We have written and commented a fair amounton the follow-the-settlements doctrine and its ap-plication to allocation of a loss to insurance andreinsurance contracts. See our ReinsuranceCommentaries, “Reinsurance and EmergingRisks” (June 2013), “Follow-the-Fortunes Updat-ed” (April 2004), and “Understanding Reinsur-ance Terminology—Follow-the-Fortunes” (Octo-ber 2001), for example. Here, we examineallocating long-tail losses to the correct insurance

policies and billing the correct reinsurers for theirshare of those losses.

When the Settlement Is Done

At some point during the evolution of a claim, itcomes to an end. Either the claim is settled, theclaim is dismissed, a judgment is rendered by acourt, or an award is issued by an arbitrator.While expenses may have been preliminarily allo-cated to specific policies and even ceded to spe-cific reinsurers during the life of the claim, oncethe claim is finalized by settlement or judgmentand the checks are cut, the insurer has to make afinal determination on how the claim—and its ac-tual expenses and indemnity payments—will beallocated to its insurance policies.

In a normal case where there is a single claimthat occurred on a specific date, there typicallyis only one policy to which the claim can andshould be allocated. Allocating a settlement tothe only possible responsible policy is generallynoncontroversial. That determination is general-ly made up front (as part of the coverage deter-mination), and, depending on the terms of thereinsurance contract covering that policy, noticeof the claim to the reinsurers should not be thatdifficult to accomplish.

But when the claim is a long-tail claim thatspans many years and many possible policies,the allocation decision may become more artthan science. This is the case with asbestos andother similar latent bodily injury claims. De-cades go by and the vagaries of state law maycause many policies to respond to the claims.Policies may or may not exist, insureds mayhave gaps in coverage, and carriers may havegone insolvent over time. When claims go backmany decades, the ability to locate all responsi-ble policies is a difficult task.

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But ultimately, when the claim is resolved, thesettling insurance company has to decide howto allocate that settlement to the policies it be-lieves must legitimately respond to the claim.And once the policy allocation decision is made,then the insurer—now the ceding insurer—willalso have to determine how to allocate that set-tlement to its reinsurance contracts and bill itsreinsurers for their share of the settlement.

Objectively Reasonable Settlements and Objectively Reasonable Allocations

We know from the caselaw that the underlyingsettlement itself must be objectively reasonableand businesslike. Under most notions of properbusiness behavior and good faith, only settle-ments that are reasonable and businesslike andthat fall within the terms of the insurance policyare settlements that a reinsurer would expect toreceive.

The cases teach us that the claims personnelmust handle the claim without regard to reinsur-ance and must act in good faith in resolving theclaim. The cases also teach us that when theclaim has to be allocated among multiple insur-ance policies, that allocation also has to be ob-jectively reasonable and made in good faith. Sotoo must the reinsurance allocation be objec-tively reasonable and made in good faith. Infact, merely following the allocation of the un-derlying polices is not, in and of itself, sufficientto establish the reasonableness of the reinsur-ance allocation.

When, in the ceding insurer’s mind, all are donein a businesslike manner, are objectively reason-able, and made in good faith, the ceding insurerwill expect nothing less than timely payment ofa properly presented reinsurance billing.

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What’s a Reinsurer To Do?

The conundrum for the reinsurer, sometimesbeing faced with a billing after decades of limit-ed—if any—information about a claim, is how todetermine if the reinsurance allocation was do-ne in an objectively reasonable manner and ingood faith. Reinsurers know that some courts inthe United States imply the follow-the-settle-ments doctrine even if the applicable reinsur-ance contracts do not have follow-the-settle-ments language. They know that under thefollow-the-settlements doctrine, reinsurers can-not second-guess the good faith claims determi-nations of the ceding insurer. They also knowthat many courts in the United States have ap-plied the follow-the-settlements principle to allo-cation.

The cases provide words like “objective reason-ableness” and “businesslike manner” when dis-cussing these principles in the context of alloca-tion. But each case is fact-specific, anddetermining the objective reasonableness andgood faith of an allocation will depend on thefacts. As the New York Court of Appeals said inU.S. Fid. & Guar. Co. v. American Re-Ins.Co., 2013 N.Y. LEXIS 112, 20 N.Y.3d 407(2013), a ceding insurer’s allocation “must beone that the parties to the settlement of the un-derlying insurance claims might reasonably havearrived at in arm’s length negotiations if the re-insurance did not exist.”

Most reinsurers want to pay legitimate claimsquickly. But to pay quickly, reinsurers need toreceive sufficient information to satisfy themthat the claim came within the underlying con-tract, was resolved in good faith, and camewithin the terms of the reinsurance contract.Sometimes it is hard to get that informationeven on a single claim paid under a single poli-


cy, let alone for 10 or 20 years of policies thatare over 30 or even 50 years old, addressingthe insured’s liability for manufacture or use ofasbestos products.

Recent caselaw provides reinsurers, with theright facts and circumstances, some opportunityto question whether an allocation was madewith objective reasonableness and in good faith.But that opportunity cannot be squanderedwith fishing expeditions; there has to be a legiti-mate basis for inquiry. And, based on the case-law, that opportunity is limited. The mere factthat the allocation decision has resulted in a sig-nificant reinsurance recovery claimed by theceding insurer may not be enough for a court toquestion the allocation decision.

To Maximize or Minimize Reinsurance

In a recent case, a court did what many courtshave done, which is to uphold an allocation ofan asbestos settlement under the follow-the-set-tlements doctrine (Utica Mut. Ins. Co. v. Clear-water Ins. Co., 2016 U.S. Dist. LEXIS 6219(N.D.N.Y. Jan. 20, 2016)). In upholding theceding insurer’s allocation as a reasonable set-tlement decision, the court commented that aceding insurer was not required to pick an allo-cation that minimized reinsurance recovery.

Fair enough—objective reasonableness andgood faith should not weigh in favor of eitherthe ceding insurer or the reinsurer. Thus, inmaking an allocation determination, the cedinginsurer should not be forced to pick one out of anumber of reasonable alternatives that minimiz-es its reinsurance recovery if, in making its set-tlement and allocation determinations, it mustdo so with a blind eye toward its reinsuranceprotections.

This comment is consistent with some othercourts’ pronouncements when discussing objec-tive reasonableness and good faith. In U.S. Fid.& Guar. Co., the court said that “[r]easonable-ness does not imply disregard of the cedent’sown interests. Cedents are not the fiduciaries ofreinsurers, and are not required to put the inter-ests of reinsurers ahead of their own.” Thecourt concluded that the ceding insurer’s motive“should generally be unimportant. When severalreasonable allocations are possible, the law, asseveral courts have recognized, permits a ce-dent to choose the one most favorable to itself.”

As the courts appear to see it, the ceding insur-er must address the claim settlement neutrally,as far as reinsurance is concerned; act in goodfaith; and proceed in a reasonable manner thatwould be viewed as objectively reasonable by athird party without consideration of reinsur-ance. In doing so, the ceding insurer does nothave to—and should not have to—pick an alloca-tion methodology that minimizes its reinsurancerecovery.

So what happens if the ceding insurer actuallypicks an allocation method that also happens tomaximize its reinsurance recovery? All thingsbeing equal, if the theory holds, as long as theallocation was done in an objectively reasonablemanner and in good faith, many courts will sus-tain the allocation determination based on fol-low-the-settlements principles applied to alloca-tion. Where there are multiple reasonableallocations possible, as the New York Court ofAppeals said in U.S. Fid. & Guar. Co., the ced-ing insurer could choose the one most favorableto itself.

Whether the follow-the-settlements doctrineeven applies to allocation is a completely differ-ent question, which, in the United States, ap-

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pears to have been answered by most courts inthe affirmative. But assuming that it does apply,the test of objective reasonableness and goodfaith will depend on the specific facts involvedin the settlement and allocation.

Where the evidence shows that the ceding in-surer was focused on reinsurance recoveriesabove all else when settling a long-tail loss andalso had the same focus when allocating thatloss to its policies and its reinsurance protec-tions, the reinsurer may have a legitimate beefthat should be taken up by the courts. But get-ting that kind proof is no small task. In themore usual case where claims professionals goabout their business as they should, an alloca-tion that results in the maximization of reinsur-ance recoveries may not be so easy to strikedown.

Conclusion

Long-tail claims, such as bodily injuries fromexposure to asbestos, have run havoc on ma-ny in the insurance industry. Policy-issuingcompanies that issued polices half a centuryago have been called on to pay losses forthese exposures. The tasks of addressingthese exposures and allocating settlements tothe proper policies, and then allocating to andbilling the correct reinsurers for their share ofthose exposures, are complicated and com-plex tasks.

But if a ceding insurer faced with settling thesetypes of exposures allocates its good faith set-tlements in a businesslike and objectively rea-sonable manner, the fact that the ceding insur-er’s allocation results in the maximization ofits reinsurance recoveries may provide littlesupport to a reinsurer’s challenge to that allo-cation. ❒

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Interplay of Loss Portfolio Transfers and Other

Reinsurance Contracts

Let’s say you work for an insurance companythat issued a portfolio of policies some yearsago but no longer writes that type of policy orbusiness. And say that this legacy business is adrain on the insurance company’s administra-tion and the company would much rather haveits administrative and claims people working onbusiness that the company currently writes andsupports.

What can you do to address this problem?

What Is a Loss Portfolio Transfer?

For decades, insurance and reinsurance compa-nies have used loss portfolio transfers (LPTs) toaddress the issue of legacy business no longercore to the company. The IRMI InsuranceGlossary of Risk Management and InsuranceTerms defines an LPT as:

A financial reinsurance transaction in whichloss obligations that are already incurred andwill ultimately be paid are ceded to a reinsur-er. In determining the premium paid to the re-insurer, the time value of money is consid-ered, and the premium is therefore less than

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https://www.irmi.com/term/insurance-definitions/loss-portfolio-transfer


the ultimate amount expected to be paid. Thecedent’s statutory surplus increases by the dif-ference between the premium and theamount that had been reserved. An insurerseeking to withdraw from writing workerscompensation coverage in a given statecould, for example, use a loss portfolio trans-fer to meet its obligations under policies it haswritten, without the need to continue theday-to-day management of the claims resolu-tion function.

An LPT is a great way to move a legacy book ofbusiness off the balance sheet. LPTs often areused for direct written business as well as for as-sumed reinsurance business. As described inthe definition above, an LPT allows an insureror reinsurer to meet its policy obligations on itsoriginal policies without being responsible forthe management of the ongoing claims. TheLPT reinsurer generally manages the claims andis responsible for the administration of the busi-ness. While the ceding insurer is still on the reg-ulatory and contractual hook for those originalpolicies, it is really the LPT reinsurer that is eco-nomically and administratively the real party ofinterest.

The Odd Reinsurer Out

What is often forgotten when considering anLPT transaction, however, is the interplay be-tween the proposed LPT and the existing rein-surance contracts reinsuring the original poli-cies. This is especially so when the LPT is of anassumed reinsurance book of business ratherthan direct insurance.

Existing reinsurers and retrocessionaires are notalways in the loop while an LPT is being negoti-ated between the ceding insurer and the LPT re-insurer. When they learn about an LPT (some-

times from a press release or at a marketconference), they may not be thrilled.

The existing reinsurers have no contractual rela-tionship with the LPT reinsurer. Yet, it’s theLPT reinsurer that will now be administeringthe claims ceded to the existing reinsurers. Re-serving may change, claims handling maychange, administrative and accounting relation-ships will change, and motivations will change.Not quite the original bargain entered into bythe existing reinsurers.

Many LPTs, if not all, are structured to be net ofthird-party reinsurance. This means that the lia-bilities transferred to the LPT reinsurer are onlythose that should remain after existing reinsur-ance has paid its share of the liabilities on theoriginal business ceded. This also means thatthe existing reinsurers have to fulfill their con-tractual obligations to the original ceding insurereven if the loss advices and requests for pay-ments are now coming from a new party withwhom the existing reinsurers have no contractu-al relationship.

Of course, if the ceding insurer is not highly rat-ed or is mostly in runoff, the existing reinsurersmay welcome an LPT, especially if the LPT re-insurer is strong and well managed. Timely set-tlements and administration cost less moneythan a poorly managed runoff for all parties.The existing reinsurers may be more comfort-able dealing with a new administrator than theoriginal ceding insurer if there were significantproblems in claims administration and handling.

The Effect of an LPT on Existing Reinsurance Contracts

The LPT may have an effect on various contractprovisions in existing reinsurance contracts.

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Consideration should be given to whether theexisting reinsurance contracts have antiassign-ment provisions, retention warranties, or otherprovisions precluding cessions of retained busi-ness.

For example, if the original reinsurance includesa broad quota share treaty with a requirementthat the ceding insurer maintains its percentageshare, an LPT of the entire reinsured portfoliomight result in a breach of the original reinsur-ance contract. Similarly, if there are excess-of-loss contracts that contain retention warrantiesor have provisions that preclude assignment ofthe ceding insurer’s retention, an LPT of the en-tire retained portion of the book may invalidatethe excess-of-loss contract.

Clearly, the LPT reinsurer has no interest in los-ing the value of the existing reinsurance. TheLPT reinsurer wants the LPT to cover onlythose liabilities net of existing reinsurance. Thefailure to carefully evaluate existing reinsuranceand then obtain buy-in from existing reinsurerscan result in the LPT turning into something itwas not meant to be and result in what shouldbe preventable disputes.

Some reinsurance contracts also have specialtermination provisions. These provisions arecustomized to each reinsurance transaction.There are special termination provisions thattrigger if the original ceding insurer transfers itsliabilities to another reinsurer. An LPT may trig-ger that kind of special termination provision.

Can an Original Reinsurer Walk Away after an LPT?

Some reinsurers and retrocessionaires may viewtheir ceding insurer’s LPT of an entire book ofbusiness as a “get out of jail free card.” The

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question is whether that is, in fact, true. Ofcourse, review of each relevant reinsurancecontract is necessary to determine whether anLPT changes or affects anything about existingreinsurance or retrocessional relationships.

In a recent case, a New York federal court con-firmed a final arbitration award between a ret-rocedent and its retrocessionaire. In Continen-tal Ins. Co. v. AXA Versicherung AG, No. 18-CV-7349 (VEC), 2019 U.S. Dist. LEXIS 583(S.D.N.Y. Jan. 2, 2019), a retrocessionaire ar-gued that it was no longer bound by its quotashare retrocessional agreement with the retroce-dent after the retrocedent entered into an LPTwith a third party on the same business. Thearbitration panel’s final award determined thatthe LPT did not relieve the retrocessionaire ofits responsibility to make retrocessional pay-ments to the retrocedent. The court confirmedthe final arbitration award.

The details of the underlying dispute were notavailable in the decision, and the arbitration in-formation is confidential, so we don’t knowwhether there was a retention warranty, antias-signment clause, or special termination provi-sion in the quota share retrocessional agree-ment. All of these cases are very fact-specific,and as they say, the devil is in the details.

In addition, while this decision did not involvethe merits of the dispute (the petition to confirmwas unopposed), it is pretty clear why the arbi-tration panel ruled the way it did.

The retrocedent remains responsible under itsexisting reinsurance and retrocessional agree-ments unless the LPT contains a novationagreement or a separate novation agreementaccompanies the LPT, which replaces the ret-rocedent with the LPT reinsurer as a matter of

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contract. While the retrocedent’s administrativeand accounting obligations were shifted to anew reinsurer under the LPT, the retrocedentremained on the hook under the existing retro-cessional contract in case the LPT reinsurer failsto perform in the future.

While these principles are more relevant to as-sumed business than ceded business, the sameprinciples apply. An LPT generally does not al-ter an existing reinsurance or retrocessionalcontract unless the original reinsurer or retro-cessionaire has agreed to the transfer of all obli-gations itself in the form of a novation.

There are many scenarios where the outcomemay differ because of specific contract wording.For example, the existing reinsurance or retro-cessional contract could have had a retentionwarranty or special termination provision that

might trigger upon the retrocedent entering intoan LPT. Each circumstance is different and mustbe reviewed completely to determine if an LPThas any effect on the liabilities under existing re-insurance or retrocessional contracts.

Conclusion

Determining how existing reinsurance contractswill interact with an LPT is a critical step toavoiding significant problems and future dis-putes. While it is easy to think that an LPT can-not affect existing reinsurance contracts be-cause it is a separate and unrelated contract,retention warranties, antiassignment provisions,and special termination clauses in existing rein-surance contracts could be triggered by an LPT.Keeping all parties, including existing reinsur-ers, in the loop while negotiating an LPTshould avoid unwanted surprises. ❒

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Why Reinsurance Matters, - Squire Patton Boggs