Reinsurance
25,000 any one unit in respect of any risk as may be declared.’ The facultative obligatory treaty was described as unpopular with some underwriters as the reinsured, B, could decide which risks to declare under the treaty, but the reinsurers Aneco were bound to accept them, within the treaty limits.12
A reinsurance contract is formed between two insurers. The insurer who covers the risk in the original insurance is called the reinsured in the reinsurance agreement, as he is the party who asks for coverage from the reinsurers. The contract between the assured and the insurer is original insurance (or underlying or direct insurance); the contract between the reinsured and the reinsurer is the reinsurance. There is no privity of contract between the assured (of the original insurance) and the reinsurer.13 The assured’s claim is to be addressed to the insurer, the assured is not entitled to claim directly against the reinsurers.14
Formation of reinsurance contracts
As seen in Chapter 2 the London market operates as a subscription market and the insurers take lines on insurance policies by their percentage of the risk they insure. The same applies to reinsurance in that reinsurers subscribe to a reinsurance contract. Therefore, a reinsurance broker will visit several underwriters to be able to achieve the amount of subscription which has been requested by the insurers (reinsured).
A reinsurance contract may be offered before an original insurance contract is formed. By virtue of a unilateral offer obtained from the reinsurer, a broker, while visiting the Boxes at Lloyd’s, may be able to inform the insurers that in the case of subscription to the original risk, the reinsurance cover for such risk has already been obtained. This unilateral offer is called a ‘standing offer’ that when a broker obtains a subscription from an insurer within the conditions of the standing offer, when the risk is insured, the reinsurer is bound by the standing offer so that the risk is insured and reinsured at the same time.15
The principles covered in Chapter 4 are applicable to reinsurance contracts as well as contracts of marine insurance. The reinsured is under the duty to disclose material facts to the reinsurers before the contract is concluded. For instance, in WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA,16 a case referred to in Chapter 4, regarding waiver of breach of the duty of good faith, the original insurance policy was in Spanish and when the reinsurance risk was presented, the Spanish word ‘watch’ was translated as ‘clock’ into English. The Rolex watches were to be carried from Miami to Cancun. The loss occurred when a quantity of goods was stolen from a container parked outside the assured’s warehouse premises in Cancun. The reinsurers rejected the claim on the score of material misrepresentation of the subject matter insured, which was accepted by the court. The presentation of the subject matter insured as clocks was a material fact given that watches, and in particular brands such as Rolex, are regarded by underwriters as attractive targets for thieves, being portable, high value and easily disposable.17
In Aneco Reinsurance Underwriting Ltd (In Liquidation) v Johnson & Higgins Ltd,18 the reinsurance agreement was in the facultative obligatory form. When obtaining the retrocession cover for the reinsurance contract the broker did not disclose the true nature of the reinsurance. This was a material fact in a retrocession contract which was in the excess of loss form.
Terms of reinsurance contracts
Reinsurance contracts may be worded as being ‘subject to the same terms and conditions as original’. This wording was held to incorporate the terms of the original insurance into the reinsurance contract.19 The way it operates in a proportional facultative reinsurance is that when the insurer is liable under the terms of the original insurance, the reinsurer will be liable. This is so because the reinsured transferred some proportionate part of the risk to the reinsurer, the reinsured and the reinsurers shared the risk and the premium, and the reinsurance contract was expressed to contain the same terms of the original insurance contract.
In HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co,20 the Court of Appeal explained the requirements that have to be met in analysing incorporation of terms from original insurance into reinsurance contracts. A term may be incorporated if it:
a) is germane to the reinsurance;
b) makes sense, subject to permissible ‘manipulation’, in the context of the reinsurance;
c) is consistent with the express terms of the reinsurance; and
d) is apposite for inclusion in the reinsurance.
Where a reinsurance contract includes the clause ‘all terms and conditions as original’, the word ‘all’ is not to be read as comprising ‘all’ terms of the original policy.21 The terms germane to reinsurance are confined to those provisions defining the period, the geographical limits and the nature of the risk undertaken by the reinsurer.22 The incorporation clause is not to be interpreted as encompassing clauses which are inconsistent with the reinsurance agreement.23 Even if a clause complies with other requirements, incorporation is not allowed to the extent that it contradicts the express provisions of the reinsurance.24 It is also permissible to incorporate a term which refers to, for example, the ‘insurer’ by manipulating it to read ‘reinsurer’.25
An example of a term which cannot be incorporated might be a time bar clause that requires the assured to make a claim in a 12-month period running from the date of loss. This term cannot be applied to claims made by the reinsured against the reinsurer, because the reinsured’s loss cannot be assessed before the assured’s loss is determined. The issue came before the Privy Council in Home Insurance Co of New York v Victoria Montreal Fire Insurance Co.26 In this case the Western Assurance Company of Canada issued a policy for the Canadian Pacific Railway Company covering railway property situated in the United States of America, Canada and Mexico. Home Insurance reinsured the 20 per cent of the risk and the defendant Victoria–Montreal Fire Insurance Company retroceded the Home Insurance reinsurance policy. On 26 April 1900, a considerable amount of property belonging to the Canadian Pacific Railway Company was destroyed by a fire. After a lengthy inquiry, Western Assurance indemnified the assured, the reinsurer then paid their proportion of loss. The retrocessionaire then denied Home Insurance’s claim against them by relying on the limitation clause contained in the original policy, and alleged by them to be incorporated with and applicable to their policy of retrocession. The Privy Council expressed their view that such a clause, namely one prescribing legal proceedings after a limited period, is a reasonable provision in a policy of insurance against direct loss to specific property where the assured is master of the situation in that he can bring his action immediately. In a case of reinsurance against liability however the reinsured cannot move until the direct loss is ascertained between parties over whom he has no control, and in proceedings in which he cannot intervene. The Court also emphasised that applying the same provision within the retrocession context might defeat an honest claim in a case where there was no default or delay on the part of the reinsured or the reinsurer as the case may be.
Jurisdiction and choice of law clauses are not incorporated by the general words of incorporation. Such clauses in direct insurance have nothing to do with defining the risk; thus they are found wholly inappropriate to disputes arising between the parties to the reinsurance contract.27 Similarly, arbitration clauses cannot be incorporated because of their ancillary and separable nature.28 If an arbitration, jurisdiction or a choice of law clause is intended to be incorporated, the reinsurance contract should expressly state so. Incorporation of terms from the direct policy should be distinguished from incorporation of terms from other sources, such as standard market wordings. In the latter case problems may arise from inconsistency between the standard terms and the express terms of the incorporating contract, which the court will be required to resolve. For instance in Axa v Ace Global Markets,28a the reinsurance was on ‘Full wording as EXEL 1.1.90.’ Gloster J found it possible to reconcile the arbitration clause in standard EXEL wording with the English choice of law and jurisdiction clause in the reinsurance slip by holding that the latter related to supervision of the arbitration and challenges to any award and, accordingly held that the arbitration clause was incorporated with other standard clauses in EXEL 1.1.90.
In the context of proportional facultative obligatory contracts, in Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd,29 Hobhouse J stated, obiter, that a number of terms are to be implied for the protection of reinsurers. These are:
a) keeping proper records and accounts of risks accepted, premiums received and claims made or notified;
b) investigating all claims and confirm that there is liability before liability is accepted;
c) acting prudently in the acceptance of risks;
d) keeping full and accurate accounts showing sums owing and owed;
e) ensuring that all amounts owing are collected promptly, and that all amounts payable are paid promptly;
f) making all documents reasonably available to reinsurers.
The implied term ‘acting prudently in acceptance of risks’ was discussed in Bonner v Cox30 in the context of a non-proportional reinsurance. In Bonner v Cox, a number of Lloyd’s Syndicates subscribed to an energy risks open cover (the 77 cover). The reinsurance was in the form of an excess of loss treaty which was offered to any underwriters who subscribed to the 77 Cover. One of the declarations to that facility was an oil well in California, referred to as Elk Point. There had been a blow-out of an oil well covered by the Elk Point declaration. The reinsurers denied liability. They argued that the reinsured had engaged in ‘writing against’ the reinsurance. The argument was that one important risk accepted under the 77 Cover – known as the Oceaneering risk – could not have been profitable without reinsurance, and that the insurers owed an implied duty of care to the reinsurers to write the risk as if there was no reinsurance – that is, that it had to be potentially profitable in its own right. The reinsurers argued that a term implied in the reinsurance contract that the reinsured was ‘to conduct the business involved in the cession prudently, reasonably carefully and in accordance with the ordinary practice of the market’. Morison J held and the Court of Appeal agreed that the Phoenix formulation did not apply to non-proportional reinsurance. Morrison J imposed a restrictive duty on the reinsured that (a) only to accept risks which would be written in the ordinary course of business; and (b) not to write business recklessly. The Court of Appeal rejected Morison J’s suggestions. Reinsurers were protected by the duty of utmost good faith, which required disclosure of the types of business to be written, and also by their own ability to use express wordings which clearly defined the nature of the risks reinsured and which entitled the reinsurers to monitor the progress of the business. Failure to take these steps ought not to allow the reinsurers to blame the reinsured. The Court of Appeal felt that dishonesty, wilful misconduct or recklessness in the writing of a risk – as where the reinsured simply exercised no underwriting judgment – might provide a remedy, not by way of breach of implied term but on the ground that the reinsurance properly construed would not cover the risk at all. The Court of Appeal noted that in a proportional contract there is a sharing of premium and losses between reinsurer and reinsured. Its function is to allow the reinsured to write business which he would not otherwise have written by increasing his capacity. A non-proportional contract, by contrast, did not involve any such sharing and indeed the parties had their own separate commercial interests: its purpose was similarly to allow the reinsured to write business which it would not otherwise have written, not by increasing capacity but rather by affording protection for existing capacity. The Court of Appeal also noted that the authorities were against any implication of the term suggested. The Court referred to Sphere Drake Insurance v Euro International Underwriting Ltd31 where even ‘arbitrage’32 was not a breach of duty as such but was a matter for pre-contract disclosure. It was submitted that this analysis throws doubt on the other implied terms identified in Phoenix, and it may be thought that there is little justification for such implication given that there are various market wordings governing claims handling and that reinsurers have no right to assume that the courts will protect them if their contract is silent.33
Presumption of back-to-back cover
The ‘as original’ clause confirms the back-to-back nature of the original insurance and proportional reinsurance contracts. In proportional reinsurance the reinsured’s liability forms the reinsurers’ liability. The reinsurers and the reinsured share the premium and the risk. It may be the case that the reinsurers may want wider protection than the reinsured has under the original insurance. In this case the reinsurers should add expressly the clauses which they believe will provide the additional protection they desire to have. Unless the reinsurance contract contains anything which cannot be seen in the original insurance, if the reinsurance terms are written ‘as original’ it is presumed that the two contracts provide identical cover and when the insurer is liable, the reinsurers will be liable up to the proportional amount they agreed to cover.
In Forsikringsaktieselskapet Vesta v Butcher,34 the House of Lords interpreted the warranty in the original insurance and which was incorporated into the reinsurance, in the same manner, as it was interpreted under the direct insurance. In Vesta, the original insurance was governed by Norwegian law which requires a chain of causation between the breach and the loss in case there is a breach of warranty. The warranty required the assured, who insured his fish farm, to provide a 24-hour watch warranty. The assured never appointed an employee to provide this, thus he was in breach of warranty. The breach however did not cause the loss since the fish farm was destroyed by a severe storm. The insurer was liable under Norwegian law. The reinsurance contract was ‘as original’ and it was governed by English law. If the reinsurance warranty was to be construed under English law, the reinsurers would not have been liable. However, the House of Lords held that because of the back-to-back nature of the proportional facultative reinsurance, the reinsurance warranty was to be construed in the same way as the original insurance warranty.
The presumption was applied in Groupama Navigation et Transports v Catatumbo CA Seguros35 despite the fact that the reinsurance contract contained an express warranty ‘warranted class maintained’. This was the same warranty as that seen in the original insurance contract. The Court of Appeal construed the original insurance and reinsurance warranties in the same manner; the insurer was liable according to the interpretation of warranties under Venezuelan law. This interpretation was held to be binding for the reinsurers whose contract was governed by English law. In Groupama the warranties were identical in that the assured guaranteed maintenance of class according to the ABS (American Bureau of Shipping) Standards and Rules. Thus, the Court of Appeal held that – although the reinsurance contract contained an express warranty in addition to the ‘as original’ wording – the original insurance warranty was carried into the reinsurance warranty, which was to be construed in the same manner as the original insurance warranty.
The presumption of back-to-back cover did not operate in GE Reinsurance Corp (formerly Kemper Reinsurance Co) v New Hampshire Insurance Co,36 in which the reinsurance contract contained a warranty which did not appear in the original insurance. The warranty in the reinsurance contract provided that a contract of employment in respect of S ‘be maintained for the duration of the Policy’. The original insurance did not contain any provision relating to the employment of S. Langley J distinguished Vesta in which the original insurance warranty was incorporated into the reinsurance. In GE Reinsurance, one policy was wholly silent on the relevant words which the other contained.37 Similarly, the presumption did not operate in Aegis Electrical and Gas International Services Co Ltd v Continental Casualty Co38 where the words ‘accident’ and ‘object’ were defined both in the original insurance and reinsurance and the definitions were not identical. The definition in the reinsurance made it clear that the scope of coverage of the reinsurance was narrower than that of the direct insurance.
Non-proportional reinsurance
The presumption of back-to-back cover does not operate in non-proportional reinsurance.39 However, it has been recently expressed that where the reinsurance is worded as original, in a non-proportional agreement, the tendency is reading the original insurance and reinsurance policy terms in the same manner, that is, as it was read under the original insurance. In Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd,40 the reinsurers retroceded the loss reinsured up to £25m in excess of £53m. Under the original insurance ‘Occurrence’ is defined to mean ‘any one Occurrence or any series of Occurrences consequent upon or attributable to one source or original cause.’ A series of floods occurred in Thailand in respect of which the assured and the reinsured settled the claim and the reinsurers indemnified the reinsured. Retrocessionaire however denied liability, reasoning that occurrence within the context of retrocession is ‘something which happens at a particular time, at a particular place, in a particular way’.41 Hamblen J held that the retrocession was to cover the reinsured’s exposure to losses arising from occurrences which have a defined meaning from the original insurance and which was incorporated into the Retrocession. Against that background, the judge held that if the parties had intended for a different type of occurrence to be covered by the Retrocession they would surely have clearly spelt out i) that that was the intention and ii) what the different meaning was to be.42
A similar discussion is seen in Amlin Corporate Member Ltd v Oriental Assurance Corp42a in which the reinsurers attempted to prevent the same interpretation as Vesta in their reinsurance contracts. In Amlin an insurance company, Oriental, established in the Philippines insured the owner of the Vessel, Sulpicio Lines Inc (‘Sulpici’), a Philippine shipping company, in respect of its liability in the period 31 December 2007 to 31 December 2008 for loss of or damage to cargo. The cover provided under the policy of insurance contained a typhoon warranty clause in the following terms: ‘Notwithstanding anything contained in the Policy or Clauses attached hereto, it is expressly warranted that the Vessel carrying subject shipment shall not sail or put out of sheltered Port when there is a typhoon or strom [sic – should be “storm”] warning at that port nor when her destination or intended route may be within the possible path of a typhoon or storm announced at port or [sic – should be “of”] sailing, port of destination or any intervening point. Violation of this warranty shall render this policy “VOID”. However, should the vessel have sailed out of port prior to there being such a warning, this warranty, only in so far as the particular voyage is concerned, shall not apply but shall be immediately reinstated upon arrival at safe port.’
Oriental reinsured the risk in London. The Reinsurance Policy, which was governed by English law, contained a ‘follow the settlements’ condition in the following terms: ‘To follow all terms, conditions and settlements of the original policy issued by the Reinsured to the Insured, for the period specified herein, in respect of sums and interests hereby insured.’ The Reinsurance Policy contained a typhoon warranty which is identical to the original insurance warranty except it omitted the second paragraph (starting ‘However …’) of the original insurance warranty. One of the scheduled vessels under the original policy was the Princess of the Stars, a Ro-Ro vehicle and passenger ferry. The vessel left Manila on 20 June 2008 despite the warning of a typhoon. It had cargo loaded on board as well as 713 passengers and 138 crew. The vessel was lost during voyage, over 800 lives were lost and only 32 of those on board survived. In the Philippines a number of claims were brought by cargo interests against Sulpicio and Oriental. While those claims were working their way through the Philippine Courts, the reinsurers sought negative declaratory relief in England that the reinsurance warranty should be interpreted under English law but not in the same manner as the original insurance warranty.
Even in non-proportional contracts, the courts may interpret identical wording in the same manner. Thus, in Amlin, what the reinsurers were aiming to achieve was a situation similar to Vesta, that is, application of a possible interpretation of a warranty under the local law in their reinsurance contract. Such interpretation, as seen in Vesta, might differ from the English law interpretation of a warranty which then may render both the insurers and the reinsurers liable although the reinsurance contract is governed by English law. After lengthy proceedings43 the reinsurers were successful in obtaining the declaratory relief sought. Lady Justice Gloster44 was prepared to accept that the original insurance and reinsurance contract warranties should be construed identically. However, her Ladyship rejected the reinsured’s argument to this effect reasoning that there was no evidence, expert or otherwise, adduced as to what would be understood in the Philippines by a typhoon warranty in the terms in which the warranty was expressed in either policy, or as to how the typhoon warranty in the Original Policy might be interpreted as a matter of Philippine law. Accordingly, the clause in the reinsurance policy was to be construed in accordance with its terms and in accordance with English law.45
Assessing the deductibles and loss
The presumption may also operate to assess the amount that the reinsurers will be liable. In Gard Marine and Energy Ltd v Tunnicliffe,46 Devon Energy Corporation (Devon), a large independent oil exploration and production company, was insured under an Energy Package Insurance. The policy was against all risks of physical loss or damage to offshore and onshore property, and business interruption. The policy was subject to a combined single limit of US
400m (for 100 per cent interest), any one accident or occurrence arising out of a Named Windstorm in the Gulf of Mexico. The policy stated:
[the] Combined Single Limit of Liability … [and] the Assured’s Retention … shall be reduced proportionately and shall apply in the same proportion as the total interest of the Assured in said well hereunder bears to 100% …
Gard subscribed to a 12.5 per cent share under the Original Policy. Gard then reinsured 7.5 per cent of its 12.5 per cent line with various Lloyd’s syndicates including Advent whose share was 2 per cent. Glacier Re reinsured 5 per cent. The reinsurance was ‘subject to all terms, clauses, and conditions as Original and to follow the Original in every respect’. The ‘Sum Insured’ clause in the reinsurance policy provided: ‘To pay up to Original Package Policy limits/amounts/sums insured excess of USD250 million (100%) any one occurrence of losses to the original placement.’
Hurricane Rita caused Devon to suffer substantial losses. Total loss was US
912.5m, Devon’s interest was about 46 per cent, that is, US
416m. The claim was settled in the sum of US
365m. Gard’s share of the payment was 12.5 per cent of this amount, that is, US
45,625,000. A dispute arose in relation to the deductible. Two interpretations were suggested before the Court:
1 (100 per cent) in the sum insured clause meant that it was necessary to ‘scale’ the deductible to match the assured’s actual interest in the insured subject matter. Thus, the deductible would be reduced from US
250m to US
114m. The amount recoverable was US
365m minus US
114m, thus US
251m. Two per cent of this amount would be US
5,020,737.
2 the deductible was not to be scaled. The full US
250m was to be deducted from the loss of US
365m: US
115m. Two per cent of US
115m = US
2.3m.
The Court accepted the first interpretation. The Court confirmed that a contract is to be construed in the way that it would have been understood by a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The reinsurance contract was subject to the same terms and conditions as original. It was supported by expert evidence of the market for insurance of offshore energy risks that the notation ‘(100 per cent)’ had a specialised and recognised meaning, namely, that of scaling.