Middle East and Africa based Clyde & Co lawyers answer important questions on the Reinsurance industry

UAE

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

There is no substantive reinsurance law in the UAE, no concept of judicial precedent and historically limited reporting of judgments. Accordingly, there is no clear legal guidance on this point.

If there is no express term in the reinsurance agreement, reinsurers are not legally obliged to follow the settlement of the reinsured. However, they may choose to do so for commercial reasons, particularly if the reinsurance cover is, in effect, a fronting arrangement whereby the reinsured is a locally licensed entity which has a nil retention and simply enables reinsurers' operation in the region.

The above is subject to the overriding obligation of both reinsured and reinsurer to act in good faith as set out in Article 246 of the UAE Civil 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?

A UAE Court is likely to have reference to the terms and conditions of the reinsurance agreement and the wider factual matrix of the case, including the intention of the parties.

In general, if there is no express clause, the reinsured will need to prove that it had a liability to pay a claim under the terms of the underlying policy both as a matter of law and fact and that it has a claim against the reinsurer under the reinsurance policy arising out the original claim. If it cannot, the reinsurer is not obliged to follow the settlement paid by the reinsured.

If there is an express follow the settlements clause, instead of having to demonstrate that there was liability under the underlying policy, the reinsured only has to demonstrate that it settled a claim on the basis that the claim, as recognised by the reinsured, was within the scope of the underlying policy and that, in doing so, it acted honestly and in a proper and business-like manner. However, if it cannot demonstrate this, the reinsurer does not have to follow the reinsured.

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

Article 1026 of the UAE Civil Code underlines in general terms the necessity of cooperation between an insured and an insurer in forming the insurance contract and facing the insured risk. Furthermore, in terms of more specific cooperation obligations, Article 1032 of the Civil Code provides that an insured is required to disclose at the time of concluding the contract all information needed to be known by the insurer to enable him to assess the risks for which he assumes liability.

It is unclear whether these provisions are also intended to apply to a contract of reinsurance (as opposed to direct insurance contracts).

In short, a reinsured is unlikely to be obliged to cooperate with a reinsurer if there is no express contractual term. As such, it is important to include an express contractual term to this effect.

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

It is unlikely that a term to cooperate with a reinsurer would be implied into a policy wording.

In terms of an express term, it is important to ensure that any Arabic version of the policy wording clearly sets out the intended effect of any breach. If this is not clearly described, it will be much harder to enforce.

South Africa

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

No, but reinsurance agreements commonly include express follow the settlement clauses.

(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 loss must fall within the scope of the reinsurance agreement.

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

No.

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

Non-compliance with such a provision by the insurer would constitute a breach of agreement and the consequences of such breach will be determined with reference to the terms of the reinsurance agreement. If the provision constitutes a condition for cover and should the insurer breach said provision, the agreement is discharged automatically as a result of non-fulfilment.

It is common for a reinsurance agreement to include provisions to oblige the insurer to co-operate with the reinsurer as a condition for cover.