Reinsurance Contracts:What you should know

September 20, 2006

Reinsurance Contracts: what you should know

PRESENTERS:

Kim Outerbridge (Wilkerson)

Associate

Attride-Stirling & Woloniecki

Alan Waring

President

Crump International

Michael Merlo

Senior Vice President & Chief Counsel

Aon (Bermuda) Ltd.

Reinsurance Contracts

• THE QUESTION

Is there ANY REINSURANCE CONTRACT that would stand up to rigorous legal/judicial scrutiny?

Discussion Outline

In this interactive discussion, the panel will examine:

1) The economics of the contract development and review process

2) Mismatches between inwards & outwards contracts

3) Follow the Settlements and the problem of “legal” liability

4) Jurisdiction, Choice of law & Dispute resolution language

The contract review process

Why does it seem that the insurance industry, as a whole, approaches contract development and review with less resource, precision or forethought than that seen in other industries (for example, banking & finance)?

Whose job is it anyway?

What are the real economics of Contract review and achieving certainty?

Reinsurance Contracts: how certain can contract certainty be?

• captives by design are often created for specific/unique client needs. What are the challenges of crafting unique language and how certain can you be of intended outcome?

• If a solution is crafted that leaves the client happy, the broker happy and the market happy can there be a false sense of security about the projected "claims" outcome? What steps to take to be as certain as possible.

• do the economics make it worth spending legal fees on?

• difference between spending fees on a 'template form', e.g the Bermuda Casualty form, and a unique tailored form

• in virtually all other financial fields there are vast legal expenses associated with setting up a contract. In insurance it is usually no more than the broker telling the client that it meets the intended need ....why?

A case in point

Great North Eastern Railway Limited v JLT

The brokers ongoing duty

What you should know about lazy construction

The myth of “back to back” coverthe downside of incorporating terms by

reference

mismatches between inwards and outwards contracts

Why cover is not back to back when that was the parties' intention

What you should know about mismatches

• Mismatches between inwards and outwards contracts.

– what are some potential pitfalls to watch out for to assure that there are no material incongruities between a captive’s inward (i.e., insurance contract with its policyholder) and outward (i.e., reinsurance contract(s) with its reinsurers) contracts?

• Use of same form for inwards and outwards contracts without sufficient attention paid to necessary modifications to each.

• Incorporating underlying contract by reference.

What you should know about incorporating by reference

– Are there particular provisions for which “incorporation by reference” or using the underlying wording as the basis for the reinsurance wording is especially problematic?• Dispute resolution clauses• Exclusive jurisdiction clauses• Choice of law clauses • Claims notice clauses• Assistance and cooperation/claims

control clauses

What you should know

– How can captives assure that their inwards and outwards contracts both reflect the parties’ intentions?

• Avoid blind “cut and paste” of boilerplate• Say what you mean, and mean what you

say.• Undertake a common sense review

A case in point

The use of standard agreements and clause books

Dornoch v Royal Sun Alliance

•72 hour clause

What you should know about proving your loss

follow the settlements clauses - why they may not be effective

burden of proof

Where a captive is presenting the claim on its reinsurers

are there special considerations for a captive? Who has the burden, when does it shift?

A case in point

• Language from a Sample Reinsurance Contract

• Excerpts from the reinsurance coverage clauses:

• 1) The Reinsurers hereby agree…to indemnify the Reinsured to the extent and in the manner set out in the Schedule against such loss as they may sustain under the Original Policy…

• 2) …the liability of the Reinsurers shall follow that of the Original Policy except when otherwise specifically provided herein and subject to the following General Conditions

A case in point

• Excerpts from the General Conditions:

• “CLAIMS CO-OPERATION AND SETTLEMENT CLAUSE” which provides:

• “The Reinsured shall determine:• (1) what shall constitute a claim or loss under the original policy• (2) the Reinsured's liability under the original policy for such claim

or loss and• (3) the amounts which it shall be proper for the Reinsured to pay

for such claim or loss”

• “LOSS PAYABLE CLAUSE” provides as follows (emphasis added)• “All claims covered by this reinsurance shall be binding upon the

Reinsurers, when the Reinsurers receive notice pursuant to General Condition 6… If such conditions are met, Reinsurers shall be bound to pay their proportions as set forth herein provided they are obligated by the terms, conditions and limits of liability of the Original Policy and within the terms, conditions and limits of this reinsurance.

Analysis (under English & Bermuda law)

• While the intention may have been to ensure that the reinsurance cover created a binding obligation on the part of reinsurers to follow settlements entered into by CAPTIVE in good faith, it is arguable that the reinsuring clauses set out above do not create an effective "follow the settlements" obligation. What this means is that the reinsured must prove the loss was covered as a matter of (a) fact and (b) law under the original policy AND under the reinsurance contract.

• We have considered whether it is arguable that the “determination” language in clause 6 (d) shifts the burden of proof onto the Reinsurer. Our conclusion is that while it is arguable, there is a substantive body of English case law which supports the view (although unreasonable from a commercial perspective) that the burden of proof is on the Reinsured.

What you should know now that you have a dispute

jurisdiction & choice of law issueswhere there is no express provisionchoosing Bermuda law v New York

or other US state law - what are the advantages, disadvantages

arbitration clauses – best practice

mediation – a money saver or time waster?

Choice of law & Dispute resolution

What are the consequences of not expressly addressing choice of law, jurisdiction, and the mechanism for dispute resolution in the reinsurance agreement?• Choice of law - if not expressed in contract, a

non-party to the contract, e.g., a court will be called upon to retrospectively determine the parties’ intent. Courts apply different conflict of law rules (vested interest, most significant contacts, governmental interest) and often times inconsistently.

• Choice of jurisdiction – if not expressed, allows for forum shopping. May be VERY significant in international context.

• Mechanism for dispute resolution - if arbitration or mediation is not expressly called for by contract will generally not be implied. Litigation may be more expensive (discovery, motion practice ...etc.) and less even-handed (judge/jury vs. specialized arbitration panel).

Choice of law & Dispute resolution– What are the respective advantages/disadvantages

of New York, Bermuda, and England and Wales choice of law clauses? How is that analysis impacted by the corresponding choice of dispute resolution mechanism and jurisdiction?

– Does choice of law really matter much if the contract calls for arbitration and includes an “honorable engagement” clause?

– What are the distinguishing features of the hybrid choice of law/arbitration clauses in the major Bermuda forms?

– What are the perceived advantages of binding arbitration over litigation? Based on your practical experience, are those perceptions valid?

– What components should an arbitration clause include?

A case in point

CGU et al v Astrazeneca Insurance Co. Ltd.

[2005 EWHC 2755 (Comm)]

Conflicting law – inwards & outwards Arbitration v Litigation – diverse results

Dispute resolution - mediation

– What are the advantages and disadvantages of including a non-binding mediation provision in the reinsurance contract? What components should a mediation clause include?

Sample Arbitration Clause

• ARBITRATION

• Any dispute, controversy or claim arising out of or relating to this Policy or the breach, termination or invalidity thereof shall be finally and fully determined in London, England under the provisions of the Arbitration Acts of 1950, 1975 and 1979 and/or any statutory modifications or amendments thereto, for the time being in force, by a Board composed of three arbitrators to be selected for each controversy as follows:

• Any party may, in the event of such a dispute, controversy or claim, notify the other party or parties to such dispute, controversy or claim of its desire to arbitrate the matter, and at the time of such notification the party desiring arbitration shall notify any other party or parties of the name of the arbitrator selected by it. The other party who has been so notified shall within thirty (30) calendar days thereafter select an arbitrator and notify the party desiring arbitration of the name of such second arbitrator. If the party notified of a desire for arbitration shall fail or refuse to nominate the second arbitrator within thirty (30) calendar days following the receipt of such notification, the party who first served notice of a desire to arbitrate will, within an additional period of thirty (30)calendar days, apply to a judge of the High Court of Justice of England and Wales for the appointment of a second arbitrator and in such a case the arbitrator appointed by such a judge shall be deemed to have been nominated by the party or parties who failed to select the second arbitrator.

Sample Arbitration Clause

• The two arbitrators, chosen as above provided, shall within thirty (30) calendar days after the appointment of the second arbitrator choose a third arbitrator. In the event of the failure of the first two arbitrators to agree on a third arbitrator within said thirty (30) calendar day period, either of the parties may within a period of thirty (30) calendar days thereafter, after notice to the other party or parties, apply to a judge of the High Court of Justice of England and Wales for the appointment of a third arbitrator and in such case the person so appointed shall be deemed and shall act as the third arbitrator. Upon acceptance of the appointment by said third arbitrator, the Board of Arbitration for the controversy in question shall be deemed fixed. All claims, demands, denials of claims and notices pursuant to this Condition N shall be given in accordance with Condition U below.

Sample Arbitration Clause

• The Board of Arbitration shall fix, by a notice in writing to the parties involved, areasonable time and place for the hearing and may prescribe reasonable rules andregulations governing the course and conduct of the arbitration proceeding, including,without limitation, discovery by the parties.

• The Board shall, within ninety (90) calendar days following the conclusion of the hearing, render its decision on the matter or matters in controversy in writing and shall cause a copy thereof to be served on all the parties thereto. In case the Board fails to reach a unanimous decision, the decision of the majority of the members of the Board shall be deemed to be the decision of the Board and the same shall be final and binding on the parties thereto. Such decision shall be a complete defense to any attempted appeal or litigation of such decision in the absence of fraud or collusion. Without limiting the foregoing, the parties waive any right to appeal to, and/or seek collateral review of the decision of the Board of Arbitration by, any court or other body to the fullest extent permitted by applicable law.

• Any order as to the costs of the arbitration shall be in the sole discretion of the Board,may direct to whom and by whom and in what manner they shall be paid.

Reinsurance Contracts – what you should know

Ask your questions!!