For many years, it was not uncommon in the London Market for “slips” to be agreed by underwriters with the full wording “TBA” or “to be agreed”. Days, weeks, months and years passed by and the full wording was never finalised. Years later, disputes were not uncommon as to what terms the parties to the reinsurance contract had actually agreed. For example, where the slip referred to an “Arbitration Clause”, which clause was it referring to? There are numerous arbitration clauses used in the London Market so the actual wording of the arbitration clause that the parties (or more likely the broker) had in mind is often far from clear. Sometimes slips would refer to a particular clause as being “attached” but no wording for the clause was ever attached.
The London Market recognised that radical changes to the agreement of wordings had to be made. First proposed in 2004, so-called “Contract Certainty” brought about an end to the “deal now, detail later” culture. It ensured the complete and final agreement of all terms between reinsured and reinsurer at the time they enter into the contract, with the reinsurance contract wording provided shortly thereafter.
Contract Certainty means that the market practices of the past have been stamped out and there is now always a reinsurance wording for contracts written in the London Market. However, the perennial problem of incompatible clauses being written into the reinsurance contract remains.
The most notable example in facultative reinsurance contracts is the inclusion of a follow the settlements clause (often as part of a “full reinsurance clause”) or a follow the fortunes clause in the same contract as a claims control or claims cooperation clause.1 A follow clause and a claims control clause cannot co-habit in the same reinsurance agreement. The effect, for instance, of a follow the settlements clause is that reinsurers agree to follow the reinsured’s settlements (provided they fall within the reinsurance as a matter of law and the reinsured has taken proper and businesslike steps to settle the claim). By contrast, a claims control clause means that reinsurers have the right to take over conduct of the underlying claim against the reinsured and no settlement can be reached by the reinsured without reinsurers’ consent.
The conflict between such clauses has been considered by the English courts on a number of occasions. The 1985 decision of the Court of Appeal in Insurance Company of Africa v. SCOR in England held that the relevant claims cooperation clause overrode any follow settlements or follow the fortunes obligation. The rationale for this, at least in the London market, is that the claims cooperation obligation emasculates the effect of the follow obligation, such that the reinsured has to prove it was under a liability to the original insured under the insurance policy before it can recover from reinsurers. In 1989, the House of Lords in Vesta v. Butcher was also faced with (on this occasion) the juxtaposition of a follow clause with a claims control clause. Here, the claims control clause was ignored and the follow clause took priority. Despite these English court rulings and their obvious incompatibility, follow clauses and claims control clauses are still found, on a not infrequent basis, in the same reinsurance contract.
A further problem is that the parties often pay insufficient attention to what the governing law of the reinsurance contract should be. Many of the facultative wordings agreed by the London Market have been developed based on clauses used for many years, taking into account English law principles and a large body of English court decisions regarding what these clauses mean. Where the governing law of the reinsurance contract is not English law, caution needs to be exercised to ensure that the terms agreed between the parties are valid and effective under the governing law chosen by the parties. For example, where the parties agree that Peruvian law applies to a reinsurance contract, the Peruvian Commercial and Civil Codes will apply. The Commercial Code includes a follow the fortunes obligation on reinsurers. Because it is part of the code, there is no need to include a follow obligation in the reinsurance contract. This means that even where no follow obligation is included in the reinsurance wording, reinsurers may still be under an obligation to follow its reinsured’s fortunes.
A similar problem arises when the reinsurance contract provides that compliance with an all-important clause such as a claims control clause shall be a condition precedent to reinsurers’ liability. If the contract is not governed by English law, the local governing law may not in fact recognise conditions precedent to liability. This is the case in many Latin American countries. In this context, the claims control clause may be rendered ineffective and reinsurers may not be able to escape liability for a claim if the claims control clause is breached. It may be possible to re-draft the standard London Market condition precedent (such as the claims control clause) to increase the likelihood of the clause being enforceable in a local jurisdiction. However, ensuring that the reinsurance contract is governed by English law is a far more effective solution.
Reinsureds and reinsurers need to ensure that they fully understand the implications of the governing law that they agree — the law that they have chosen may not give full effect to the terms included in the reinsurance contract. Equally, the reinsurance contract may be subject to terms that are not expressly included in the wording and this may override the contractual bargain that the parties believe that they have agreed.