UK and Europe based Clyde & Co lawyers answer important questions in the Reinsurance industry.

UK

(1) Must reinsurers follow the settlements of their cedants, in the absence of an express term in the reinsurance agreement?

If there is no express follow the settlements clause, the reinsured must prove that the loss fell both within the scope of the original insurance and the reinsurance contract.

(2) If there is an express or implied term to follow the settlements in the reinsurance agreement, is the reinsurer obliged to follow in all circumstances?

Caselaw has established that a reinsurer would be bound to follow the settlements made by the reinsured provided the following two conditions were met:

(a) As a matter of fact, the reinsured had acted honestly and had taken all proper and business-like steps in reaching the settlement; and

(b) As a matter of law, the claim by the original insured, which the reinsured has paid, fell within the risks covered by the reinsurance contract.

Facultative proportional reinsurance contracts are assumed to provide back-to-back cover for reinsureds (ie they cover exactly the same loss, on the same terms, as the underlying policy between the reinsured and the insured). Where the original and reinsurance contracts are on identical terms, it has been held that the second condition is satisfied if the reinsured shows its settlement is arguably within the risks covered under the reinsurance.

(3) Is a reinsured obliged to cooperate with a reinsurer in the absence of an express term in the reinsurance agreement?

No: in the absence of an express term, the reinsurer has no right to interfere with the reinsured's handling of the claim.

(4) If there is an express or implied term to cooperate with the reinsurer, what is the consequence of a breach?

The effect of a breach of a claims cooperation or claims control clause will depend on the classification of the clause. If it is a condition precedent to liability, the insurer or reinsurer will be under no obligation to indemnify if the insured or reinsured has failed comply with the terms of the clause. However, if the clause is a "bare" condition, the only remedy available to the insurer or reinsurer will be damages, if proven (unless the insurer or reinsurer can establish the unlikely event that the contract has been repudiated). How the term is labelled can be an indication of the intention of the parties, but it will not be determinative

France

(1) Must reinsurers follow the settlements of their cedants, in the absence of an express term in the reinsurance agreement?

Under general contract rules it is an implied term that all contracts must be performed in good faith and that no contract can be concluded in breach of the rules of public policy. Some commentators note that "follow the fortunes" or "follow the settlements" clauses are implied by the very nature of reinsurance, even if they are not stipulated expressly in the Insurance Code.

(2) If there is an express or implied term to follow the settlements in the reinsurance agreement, is the reinsurer obliged to follow in all circumstances?

This will depend on how the follow the settlements clause is drafted. It is common for follow the settlements to provide that the reinsurer will cover settlements made by the reinsured in a businesslike manner.

(3) Is a reinsured obliged to cooperate with a reinsurer in the absence of an express term in the reinsurance agreement?

No. However, reinsurers and cedants are free to define, in the reinsurance agreement, which documents the cedant must provide to the reinsurer and the extent to which the reinsurer can monitor the cedant's decisions. Claims co-operation or control clauses can be freely negotiated.

(4) If there is an express or implied term to cooperate with the reinsurer, what is the consequence of a breach?

This will depend on how the term is drafted.

Germany

(1) Must reinsurers follow the settlements of their cedants, in the absence of an express term in the reinsurance agreement?

There have been discussions about whether the follow the settlements principle is an implied term, and as such in principle binding, but this has not yet been acknowledged by a court decision or published arbitral award.

(2) If there is an express or implied term to follow the settlements in the reinsurance agreement, is the reinsurer obliged to follow in all circumstances?

No, the reinsurer is not obliged to follow in all circumstances. If the cedant deliberately or grossly negligently violates the principle of proper conduct of business, the reinsurer is partially or completed released from its obligation. Furthermore, a follow the settlements clause only obliges the reinsurer to cover risks or damages which are covered by the reinsurance contract. Excluded risks as well as unusual risks which are so extraordinary that the reinsurer could not have expected them, even within the scope of an obligatory reinsurance contract, do not oblige the reinsurer to follow. In addition, the reinsurer is not obliged to follow if the cedant makes payments as a courtesy, i.e. if the cedant and policyholder agree that the cedant is not liable (eg in case of ex-gratia payments).

(3) Is a reinsured obliged to cooperate with a reinsurer in the absence of an express term in the reinsurance agreement?

No, but it is quite common to include a claims cooperation or a claims control clause in a reinsurance contract. However, given that reinsurance contracts are not governed by the German Insurance Contract Act, there is no statutory obligation to include such clause.

(4) If there is an express or implied term to cooperate with the reinsurer, what is the consequence of a breach?

The consequences of breach should be set out in the reinsurance contract.

Spain

By way of background, reinsurance is regulated in the Insurance Contract Act 1980, but the regulation is most limited, only with:

  • a definition of reinsurance: under the reinsurance contract, the reinsurer undertakes to pay, within the limits established by the Law and in the contract, a debt of the reinsured as a consequence of the liability assumed by this as an insurer in an insurance contract;
  • a reference to the lack of action of the insured against the reinsurer; and
  • an indication that the Act is not mandatory for reinsurance contracts.

In addition, Spain is not common forum for reinsurance litigation, so the number of judgments dealing with reinsurance issues is also most limited. Therefore, the response to the questions shall be grounded on comments by legal authors, rather than on legal provisions or court precedents:

(1) Must reinsurers follow the settlements of their cedants, in the absence of an express term in the reinsurance agreement?

Yes. It is broadly considered that it is for the cedant to handle and settle claims. In other words, it is said that the cedant has the right to handle claims and this includes discretion as to settlement of claims. Only if the reinsurer proves that the claim paid was not covered under the direct policy (i.e. ex-gratia payment by the cedant) or fell outside the scope of cover of the reinsurance contract, then the reinsurer may not follow.

(2) If there is an express or implied term to follow the settlements in the reinsurance agreement, is the reinsurer obliged to follow in all circumstances?

Same as above. Having said this, the content of the relevant clause may be relevant.

(3) Is a reinsured obliged to cooperate with a reinsurer in the absence of an express term in the reinsurance agreement?

For the reason explained above (it is generally accepted that the cedant is competent to deal with claims), there is no presumed obligation of a cedant to cooperate with a reinsurer.

(4) If there is an express or implied term to cooperate with the reinsurer, what is the consequence of a breach?

In Spain, conditions precedent do not exist as such and generally breach of a condition in an insurance/reinsurance contract will only allow to claim for damages arising from the breach.