North America based Clyde & Co lawyers answer important questions on the Reinsurance industry.
(1) Must reinsurers follow the settlements of their cedants, in the absence of an express term in the reinsurance agreement?
There isn't a great deal of caselaw on this point but it seems that an obligation to follow the settlements (agreed upon in the underlying claim) will be implied if there is sufficient evidence to show that that was the intention of the parties.
Indeed, the Court may read a "follow the settlement" clause into the reinsurance agreement if the cedant establishes the following:
(a) the existence and content of a prior agreement;
(b) a written instrument that does not reflect the true agreement of the parties;
(c) the parties must have shared a common continuing intention up to the time of signature that the provision in question stand as agreed rather than as reflected in the instrument; and
(d) the precise form in which the written instrument can be made to express the prior agreement
(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?
Reinsurers will not be obliged to pay if the cedant made an ex gratia payment (outside of the insurance policy coverage) or if the loss falls outside the scope of the reinsurance agreement.
The reinsurer could also avoid payment by showing that the settlement arranged by its cedant was not reasonable.
(3) Is a reinsured obliged to cooperate with a reinsurer in the absence of an express term in the reinsurance agreement?
Parties to a reinsurance agreement owe a duty of utmost good faith to each other. This notably encompasses a duty of disclosure, transparency and cooperation and requires parties to act fairly.
(4) If there is an express or implied term to cooperate with the reinsurer, what is the consequence of a breach?
The consequences of a breach of the duty to cooperate will depend on the precise nature of the breach and the impact on the reinsurer. Caselaw dealing with insurance contracts suggests that a breach of the duty to cooperate by the insured may allow the insurer to deny indemnity under some circumstances. For example, the insurer might have to show that it actually sustained a prejudice from the lack of cooperation. By extension, this rule could apply to a reinsurance agreement.