Reinsurance which is a specific and relatively complex part of the “insurance world”, can be briefly and simply summarized as the insurance of insurance. The ceding company ( primary insurer ) benefiting of a reinsurance coverage by entering into a reinsurance agreement with reinsurers . The said agreed contract detailing terms and conditions between parties.
In view of its international specificities, reinsurance is not as much as regulated than insurance, and legally speaking depends in case of litigation on the applicable law agreed into the reinsurance agreement by the parties.
It is still that reinsurance customs and practices have been largely influenced by the Common Law, and especially by the Lloyd’s of London.
Same as for primary insurance, one of the essential obligation to benefit from a reinsurance coverage is for the ceding company to pay premiums on time to reinsurers, and as per the procedure agreed between the parties into the reinsurance agreement.
In the actual reinsurance environment, it became common to use premium payment warranty which require the ceding company to effect payment prior to a specific day In such a case, and if the payment is not effected prior to the deadline, the reinsurance coverage would be automatically cancelled.
However, and in the absence of a premium warranty into the reinsurance agreement, what would be the consequences of a late payment of premiums ?
- Effects of late payment in the absence of a premium warranty:
As mentioned earlier, reinsurance customs and practices have been largely influenced by the Lloyd’s of London, reason why, our study will be based on Lloyd’s court precedents.
A. Reinsurance coverage cannot be cancelled only as a result of a late payment.
As per some precedents judgments rendered (Fenton Insurance co.Ltd v. Gothaer Versicherungsbank 1 Lloyd’s Rep.1991, and Figre Ltd v. Mander 1999, Lloyd’s Rep.IR 193.), and in the absence of a premium warranty, it appears that a reinsurance coverage cannot be cancelled only as a result of late payment of premiums by the reinsured to reinsurers.
B. Except if a notice has been served to the ceding company by reinsurers.
Where a premium warranty is not present into the reinsurance agreement, a reinsurance coverage can only be cancelled if a notice of cancellation has been served to the ceding company by reinsurers. In addition, the said notice of cancellation should request a payment to the ceding company within a reasonable time and specifying that time is of the essence ( i.e payment on due time is an essential obligation of the contract).
i. In a Lloyd’s case rendered in 1991, (Fenton Insurance co.Ltd v. Gothaer Versicherungsbank 1 Lloyd’s Rep.1971) in respect of a marine quota share reinsurance treaty entered into in 1976 ( It was agreed between parties that accounts were to be settled on quarterly basis).
The ceding company did not paid any premiums as from inception ( i.e 1976) up to 1985, and was seeking to recover claims from reinsurers in respect of the period of 1976 to 1979.
The Lloyd’s court rendered a decision which obliged reinsurers to pay claims, even if they did not receive any premiums payment for such a long time.
This decision was based on two main arguments:
- There were still some communications between parties, including quarterly statements, sent to reinsurers by the ceding company. As such, there was no strong basis to consider that the treaty had been cancelled.
- Delay in premium payment did not lead to an automatic cancellement of the reinsurance coverage.
ii. A similar decision was rendered in 1999, Figre Ltd v. Mander 1999, Lloyd’s Rep.IR 193.
Premium payment were not paid since the inception ( March 1984) by the retrocedant ( i.e reinsurer of a ceding company) to his retrocessionaires ( reinsurers of the retrocedant) under an excess of loss reinsurance treaty.
In July 1990, the retrocedant was seeking to recover claims from retrocessionaires which objected in view of the non premiums payment, arguing that they are off of coverage.
Following the same logic of the previous studied case, the Lloyd’s court obliged retrocessionaires , to pay claims even in the absence of premiums payment.
Two points were raised to justify this decision:
- Since the retrocession agreement did not contain any provision referring to consequences of a late payment of premiums, there was no automatic cancellation of the retrocession coverage.
- In order for retrocessionaires to argue a cancellation of the retrocession coverage, the latters should have served a notice of cancellation to the retrocedant requiring a payment within a reasonable time, and specifying that failure of complying with, would have as an effect to cancel coverage.
In the presence of a premium warranty agreed in a contract between parties, it appears clear that a ceding company should comply with the time frame imposed by the warranty, in order to avoid any cancellation of the reinsurance agreement.
It is still that in the absence of such a provision into a reinsurance agreement, a reinsurer in order to consider itself safely off of coverage has to serve a notice on the ceding company demanding payment within a reasonable time, specifying that time is of the essence, and that failure of payment would lead to a cancellation of the reinsurance agreement (Fenton Insurance co.Ltd v. Gothaer Versicherungsbank 1 Lloyd’s Rep.1991, and Figre Ltd v. Mander 1999, Lloyd’s Rep.IR 193.).