Key takeaways for reinsurers going into renewal season

With 1 January renewals fast-approaching, from a legal perspective it is worth parties keeping in mind a number of matters relevant to wordings which can avoid difficulties when claims inevitably arise. 

Reduce ambiguous or inconsistent clauses 

During softening market conditions, brokers may look to vary more established, market standard clauses in both insurance and reinsurance contracts with a view to improving terms for their clients. In this process, the introduction of ambiguous or inconsistent clauses may lead to uncertainty and present difficulties when claims arise. 

It is important to assess whether any proposed variation of particular clauses is workable, individually and in the context of the policy as a whole, in order to avoid disputes where the meaning of specific clauses is objectively unclear, or where inconsistent terms cannot sensibly be read together. Small changes to particular provisions can have significant effects in terms of policy application, so proposed alterations should be considered carefully.

Consider governing law clauses 

Underwriters and brokers may often consider the terms of cover at placement with a quasi-English law (or similar) view of how policy terms operate. However, incorporating different governing law clauses will mean that all of the terms of cover will be interpreted according to that system of law, which at times can lead to surprising results, particularly in jurisdictions with no system of precedent and/or a paucity of established insurance law. 

This issue is more pronounced where reinsurance contracts are concerned. English law may be preferred in reinsurance contracts, given that decades of reinsurance litigation have delivered a high degree of clarity and judicial guidance on how reinsurance contract terms operate. Other legal systems may have limited (if any) precedent on reinsurance matters which can lead to uncertainty and decisions which conflict common law insurance principles.

It is often assumed, wrongly, that providing for English law in facultative reinsurance contracts, where there is a different governing law in the underlying insurance, can lead to inconsistency of cover between the direct cover and the reinsurance. However the English courts have clearly held that terms incorporated by reference from underlying cover will be construed in accordance with the ‘legal dictionary’ of the law of that underlying cover (leaving established English law to govern the operation of the reinsurance framework itself). 

Ensure dispute resolution clauses provide the most effective and efficient procedures to resolve disputes  

Parties will need to consider what dispute resolution provisions are most suitable for their needs and expressly provide for these (note: typically law, jurisdiction and arbitration clauses will typically not be incorporated into the reinsurance from the underlying cover). 

Insurance and reinsurance contracts often include clauses requiring disputes between the reinsurer and reinsured to be submitted for arbitration, rather than subject to litigation. 

Particularly where there are concerns over the likely approach of local courts in less familiar jurisdictions, the incorporation of arbitration clauses providing for neutral and reputable international arbitral rules (e.g. ICC, SIAC, LCIA), where permitted, can provide a level of comfort. Such clauses should preferably provide for arbitration of both liability and quantum issues (rather than being limited to quantum only, “liability being otherwise admitted”).

These issues can have a very significant impact on ease of dispute resolution at the claims stage and parties would be wise to give them due consideration at placement.