Payment of Premium


(1) Premium Warranty Clause


(2) Implied Term


(3) Repudiation


(4) ‘Premiums and claims to be settled in account’



Claims Co-operation Clause/ Claims Control Clause


(1) Typical Features of Claims Co-operation/Control Clauses


(2) Costs of Litigation where the Reinsurer has Withheld its Approval


(3) Claims Co-operation Clause: A Condition Precedent?


(4) Consequences of Breach of a Claims Co-operation/Control Clause which is not a Condition Precedent


(5) Qualification of the Reinsurer’s Rights under a Claims Co-operation Clause



Inspection of Reinsured’s Records



Declaratory Relief





A. Payment of Premium

5.01 As outlined in Chapter 2, the premium is the consideration for the contract which proceeds from the reinsured to the reinsurer in return for coverage according to the policy terms. The reinsured’s agreement to pay the premium is normally sufficient as the payment itself may follow some time later. A reinsurer has the right to treat the contract of reinsurance as discharged upon non-payment of the premium if the contract contains an express right to cancel for non-payment of premium (for example under a premium warranty clause). In the absence of such an express clause, cancellation may be justified if it is an implied condition of the contract that the premium would be paid in advance or on the grounds that the reinsured has repudiated the contract by evincing an intention not to pay the premium.1

(1) Premium Warranty Clause

5.02 A reinsurer may reserve to itself the right to treat the contract of reinsurance as at an end on non-payment of the premium by the inclusion of a premium warranty clause.2 However, the reinsurer may be precluded from relying on a breach of the premium warranty clause if it acts in a way, following breach, which is only consistent with an intention to continue with the contract. In Compagnia Tirrena Di Assicurazioni SpA v Grand Union Insurance Co Ltd3 the reinsurer, following the failure of the reinsured to pay the premium on time, made demands for premiums as they fell due. Waller J held that the demands for premiums which were only due on the basis that the contract continued were unequivocal acts affirming the contract. From the moment of their communication they affirmed the contract and both parties were bound by that election. Further, Waller J said that where, following the reinsurer’s demand, the reinsured tenders payment, he doubted whether the reinsurer would have any entitlement to reject the payment tendered. If there was such an entitlement, Waller J said that any rejection of that payment is required within a reasonable time if that too is not to be taken as an act affirming the contract.4

(2) Implied Term

5.03 In Pacific & General Insurance Co Ltd v Hazell5 the contract provided for a minimum and deposit premium expressed to be payable ‘in four equal instalments in advance’. Moore-Bick J held that it would require very much clearer language than this to give rise to an implication that payment on a due date is a condition of cover under the contract.6 He said that the stipulation for payment in advance in the contract was merely intended to establish that instalments of premium fell due at the beginning rather than at the end of the relevant period and did not make prompt payment a condition of the contract so that any breach would entitle the reinsurer to treat it as discharged. Similarly, he rejected the argument that the provision for payment of instalments of premium in advance was sufficient to make payment of the premium a condition precedent to the reinsurer’s liability under the contract.7 Hazell suggests that a court will be reluctant to imply a term making prompt payment of premium a precondition to the reinsurer being on risk.

(3) Repudiation

5.04 A failure to pay premium will not usually of itself amount to a repudiation of the contract of reinsurance.8 In Fenton Insurance Co Ltd v Gothaer Verischerungsbank VvaG9 Potter J pointed out that in the context of insurance business in which accounts are rendered and balances paid through brokers and underwriting agents and where delays in payment are not infrequent, it would rarely be possible to infer an intention not to perform the contract from a simple failure to pay balances. However, he did recognize that different considerations might apply to a persistent failure to pay despite demands or protests.10 In Hazell, the reinsured’s failure to pay the first two instalments of premium coupled with the clear statement that no funds would be made available for the payment of premium in the future was held to be sufficient to amount to a repudiation of the contract of reinsurance.11

5.05 If the reinsured has evinced an intention no longer to be bound by the contract, in order to discharge the contract of reinsurance the reinsurer will need to accept the repudiatory breach. No particular form of words is necessary; all that is required is that the reinsurer’s intention to treat the contract as discharged is effectively communicated to the reinsurer.12 Any such acceptance will only discharge the parties from their obligations prospectively.13

(4) ‘Premiums and claims to be settled in account’

5.06 In Compagnia Tirrena Di Assicurazioni SpA v Grand Union Insurance Co Ltd14 the relevant clause provided for ‘Premiums and claims to be settled in account. Premium warranty on due dates.’ Waller J held that on the true construction of this clause the reinsured was entitled to pay the premium by rendering an account showing claims in excess of premium.

B. Claims Co-operation Clause/Claims Control Clause

5.07 A reinsurer can circumscribe the power of the reinsured to make settlements or other decisions which are binding on it by the use of a claims co-operation clause. This clause gives the reinsurer the right to be involved in the investigation and settlement of the underlying loss. A claims control clause gives a reinsurer even more influence in the handling of the original claim by the underlying insured. There are many forms of these clauses in use, each of which varies in the level of involvement given to the reinsurer from a right merely to be consulted to the right to exercise full control in respect not only of negotiations and settlement but also of the defence of the claim.

5.08 Standard clauses such as claims control clauses and claims co-operation clauses in reinsurance contracts should receive a uniform construction, whoever proposed them, ie the contra proferentem rule does not apply.15

(1) Typical Features of Claims Co-operation/Control Clauses

(a) Notification of loss16

5.09 Notification of loss clauses are not commonly found in contracts of reinsurance but a requirement to notify the reinsurer of a loss or claim may be included as part of claims co-operation/control clauses. Notification can trigger the exercise of the reinsurer’s rights under the claims co-operation/control clauses, ie once notified of a claim the reinsurer can then decide whether it wants to exercise its right under a claims control clause to control the investigation and settlement of the claim. The requirement to notify the reinsurer does not generally impose any obligation upon the reinsured to take positive steps to acquire the relevant knowledge. However, once it has actual knowledge of a claim then the obligation to advise reinsurers is triggered.

5.10 Where the subject of the reinsurance is the legal liability of the underlying insured for financial loss suffered by third parties the relevant ‘loss’, in a clause requiring notification upon knowledge of any loss which may give rise to a claim, will be that of the third party claimant rather than that of the underlying insured.17 Once the reinsured has actual knowledge of a ‘claim’ against the underlying insured it knows that a third party claimant may have suffered an actual loss, which may give rise to a claim by the underlying insured against the reinsured, which may give rise to a claim on the reinsurance. If and when the reinsured obtains actual knowledge that the third party claimant against the underlying insured has suffered an actual loss, then the reinsured will have actual knowledge of a loss which may give rise to a claim under the reinsurance and his duty to notify under such a clause will then be triggered.18

5.11 In Royal & Sun Alliance Insurance plc v Dornoch19 the claims co-operation clause required notification within 72 hours of knowledge of a loss which might give rise to a claim. The Court of Appeal held that the relevant loss was that of the third party claimant seeking to recover from the original insured. However it also held that no loss would be ‘known’ until the insured settled the claim. Before the settlement the loss was an alleged loss and would not, therefore, be known to be a loss. The reinsurers argued that such a conclusion rendered the clause entirely useless in the very circumstances when it should be operative but the Court of Appeal held that the reinsured could not know that there had been a loss before it was ascertained by the fact of settlement.20

5.12 Often the reinsured will only have actual knowledge of an actual loss once it has been proved or admitted in court or arbitration proceedings or accepted as part of a settlement. The reinsured could attain actual knowledge of an actual loss prior to the conclusion of proceedings by receiving that information from an external source. An example is the reinsured who learns from Lloyd’s List that a ship has sunk. In those circumstances, the reinsured would have actual knowledge of an actual loss of the underlying insured owner of the ship because the probability is that Lloyd’s List is accurate and the loss has, in fact, occurred.

5.13 At first instance Royal & Sun Alliance Insurance Plc v Dornoch21 Aikens J held that objective knowledge was enough so that the reinsured must be deemed to know what any reasonable insurer would have known in the circumstances of this case. This was the submission of the reinsurers in AIG Europe (Ireland) Ltd v Faraday Capital Ltd.22 Longmore LJ held that it was unnecessary for that question to be addressed commenting:

I am far from saying Aikens J was wrong, but I would prefer to decide the question in a case where it mattered. Since insurers are, of course, knowledgeable people it will be a rare case indeed in which an insurer did not know of a loss in circumstances when any knowledgeable insurer would have done.

(b) Consultation/co-operation in claims handling

5.14 Claims co-operation clauses impose an obligation upon the reinsured to co-operate with its reinsurer so as to put the reinsurer in a position where it can make a sensible judgement regarding any proposal to settle or compromise a claim. Consequently, the duty to co-operate will extend to matters concerning the determination of the nature, scope, and amount of any loss and whether it falls within the policy cover.

5.15 In Gan Insurance Ltd v Tai Ping Insurance Co Ltd (No 2)23 the Court of Appeal held that the obligation to co-operate with reinsurers ‘in the investigation and assessment of any loss and/or circumstances giving rise to a loss’ did not require the reinsured to co-operate in any investigation the purpose of which was to demonstrate that the reinsured was in breach of the contract of reinsurance. However, the obligation to co-operate did cover investigation of whether the loss involved any breach by the underlying insured of any policy term or warranty. The obligation is likely to extend to investigation of possible non-disclosure/misrepresentation related to the circumstances later giving rise to the loss which might entitle the reinsured to avoid their policy with the underlying insured.24 However, the duty to co-operate is unlikely to require the reinsured to investigate a potential breach of warranty or misrepresentation unrelated to the particular loss since it is that loss which triggers the duty.

5.16 In Lexington Insurance Co v Multinacional De Seguros Sa25 there was a question whether or not the reinsurers’ denial of liability meant that, as a matter of construction, there could be no ‘[cooperation] with the reinsurers in the adjustment and settlement of the claim’ in accordance with a condition precedent. Christopher Clarke J held that this was dependent on the nature of the denial and the stance actually taken by reinsurers. A reinsurer who denies liability and thereafter refuses to have anything to do with the claim on that account precludes co-operation by his very refusal. However a reinsurer can maintain a contention that he has already been discharged from liability whilst actively co-operating with the adjustment and settlement of the claim without prejudice to that contention. That stance would not prevent the reinsured complying with its obligation to co-operate. On the facts of this case the reinsured was in breach of the claims co-operation clause as it had expressly waived the time bar of the claim. Its renunciation of the time bar was a plain breach of the obligation to co-operate with the reinsurers in the relevant settlement.

(c) Control of negotiations and settlement

5.17 A claims control clause gives a reinsurer even more influence in the handling of the original claim by the underlying insured. A typical clause would provide that

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