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Republished with permission from New Appleman Insurance Law Practice Guide.
All rights reserved.
Chapter 40
UNDERSTANDING REINSURANCE
I. OVERVIEW
40.01 Scope
40.02 Key Practice Insights
40.03 Master Checklist
40-2
Understanding Reinsurance
40-3
New Appleman Insurance Practice Guide
X. FORMS
40-4
I. OVERVIEW.
reinsurance is called the “reinsurer”. Typically, these are the only parties to
the reinsurance agreement; all rights and obligations run only between
them. The reinsurance contract does not change the direct, or original,
insurer’s responsibility to its policyholder (the “original insured” or
“policyholder”), and the insurer must fulfill the terms of its policy whether
or not it has reinsurance or whether or not the reinsurer is rightly or
wrongly refusing to perform. The liability or risk ceded is called a
“cession,” and the original policy that the cedent issues to a policyholder
is referred to as “direct” insurance. A reinsurer also can purchase its own
reinsurance protection, and such reinsurance of reinsurance is called a
“retrocession.” A reinsurer that transfers all or part of its assumed
reinsurance is called a “retrocedent,” and the company reinsuring this risk
is called the “retrocessionaire.” Retrocessions need not incorporate the
original reinsurance and often do not. (Retrocessionaires in turn can
purchase reinsurance again, ad infinitum.)
Reinsurance relationships can be simple or complex. A cedent can cede
certain loss exposures under one contract or purchase several contracts
covering different aspects or portions of the same policy to achieve the
desired degree of coverage. A layering process involving two or more
reinsurance agreements is commonly employed to obtain sufficient mon-
etary limits of reinsurance protection. When a claim is presented, the
reinsurers respond in a predetermined order to cover the loss.
The reinsurance relationship is evidenced by a written contract reflecting
the negotiated terms. Although reinsurance contracts between different
cedents and reinsurers can include clauses with similar purposes, the
wording of particular provisions varies significantly, depending on the
parties’ specific needs, customs and practices. Sample clauses are pro-
vided where instructive.
Payments that are due pursuant to a reinsurance agreement are consid-
ered an asset of the cedent; in contrast to other types of contingent
payments, the applicable regulatory regime may permit the cedent to
count a reinsurance recoverable as a present asset on its own balance
sheet. Reinsurance is payable only after the cedent has paid losses due
under its own insurance agreements. However, most U.S. reinsurance
contracts include an insolvency clause, which allows the receiver of an
insolvent insurer to collect on reinsurance contracts as if the insolvent
insurer had paid the claim in full even if it did not [see § 40.08 below
discussing the insolvency clause].
Reinsurance should not be confused with other commercial arrangements.
It is not co-insurance, where separate insurers assume shares of the same
insurance risk. Nor is it a novation as between the original insured and its
40-6
Understanding Reinsurance 40.01
Reinsurance claims generate certain legal issues distinct from issues that
typically arise in the context of direct insurance. Rules found in insurance
law in different arenas may not apply or may apply with different nuances
in the context of reinsurance disputes, and the duties and obligations
between a cedent and reinsurer may differ from those between an original
insurer and policyholder, considering some of the differences in the
relative sophistication and bargaining power, custom and practice, or
different aspects in which one party is largely dependent upon another.
Several important distinctions between the resolution of insurance and
reinsurance disputes are examined in this chapter, including the effect of
the bilateral duty of utmost good faith, which is perhaps unique to
reinsurance agreements. Reinsurance disputes also are distinguished by
their typical resolution through arbitration, rather than courtroom litiga-
tion. Among other differences, in typical U.S. arbitrations, the availability
and weight of legal precedent is less predictable and meaningful than in
litigation in the courts. Arbitrators may not be bound by strict legal rules
and do not always strictly apply contract law and other legal principles to
reinsurance agreements; indeed, some reinsurance contracts eschew reli-
ance upon legal rules in favor of construing the reinsurance relationship
memorialized by the reinsurance contract as principally an honorable
engagement pursuant to industry custom and practice.
40-9
40.03 New Appleman Insurance Practice Guide
Discussion: § 40.04[1]
□ Understand whether the reinsurance at issue is proportional or
non-proportional.
Discussion: § 40.04[2]
Forms: §§ 40.30-40.32
□ Become familiar with specific types of reinsurance such as catas-
trophe reinsurance, clash cover and finite reinsurance.
Discussion: §§ 40.04[3]-40.04[4]
□ Understand how insurers must account for finite risk reinsurance
under applicable regulations.
Discussion: § 40.04[4]
□ Determine all of the parties’ responsibilities and liabilities in a
fronting arrangement, including any obligation to monitor a man-
aging general agency.
Discussion: § 40.04[5]
□ Confirm that fronting is permissible in the jurisdiction where the
arrangement is executed.
Discussion: § 40.04[5]
□ Determine if special circumstances exist which may provide
grounds for a policyholder of the ceding insurer to assert a direct
action against the reinsurer.
Discussion: § 40.05[1]
□ Research the legality and enforceability of cut-through clauses (or
assumption of liability endorsements) contained in insurance con-
tracts covered by reinsurance.
Discussion: § 40.05[2]
□ Understand the credit for reinsurance laws governing your rein-
surance transaction.
40-10
Understanding Reinsurance 40.03
Discussion: § 40.06
□ Confirm that a letter of credit obtained by a ceding company that
intends to take financial statement credit for reinsurance placed
with a non-admitted reinsurer complies with statutory require-
ments.
Discussion: § 40.07
□ Ensure that an adequate insolvency clause is included in the
reinsurance contract if required in your jurisdiction. Most states
require that the reinsurance contract include an insolvency clause
for the ceding insurer to take credit for reinsurance on its financial
statement.
Discussion: § 40.08
Form: § 40.34
□ Understand the effect of an offset clause, or any applicable common
law or statutory set-off rights, on the rights and obligations under
the reinsurance agreement.
Discussion: § 40.08
Form: § 40.35
□ Understand the requirements of the reinsurance contract’s notice
provision.
Discussion: § 40.09[1]
Forms: §§ 40.36-40.38
□ Determine whether, in your jurisdiction, the reinsurer must dem-
onstrate prejudice in order to successfully assert a late notice
defense.
Discussion: § 40.09[2]
□ Understand the effect of an access to records clause in the reinsur-
ance agreement.
Discussion: § 40.10[1]
Form: § 40.39
□ If your client is the ceding insurer, beware the consequences of
40-11
40.03 New Appleman Insurance Practice Guide
Discussion: § 40.10[2]
□ Research the applicability in your jurisdiction of the common
interest doctrine to a cedent’s disclosure of privileged communi-
cations to its reinsurer.
Discussion § 40.10[2]
□ Determine whether the parties to a reinsurance contract should
execute a confidentiality or common interest agreement to try to
preserve applicable privileges or immunities against disclosure to
third parties.
Discussion: § 40.10[2][f]
□ Understand the circumstances under which a reinsurer can compel
disclosure of its cedent’s privileged communications.
Discussion: § 40.10[3]
□ Understand the circumstances under which an insured will be
entitled to discover its insurer’s reinsurance information.
Discussion: § 40.10[4]
□ Become familiar with the rights and obligations presented by right
to associate and claims control clauses in reinsurance contracts.
Discussion: § 40.11
Forms: § 40.41
□ Draft the reinsuring or business covered clause of the reinsurance
agreement carefully to avoid disputes concerning the scope of
coverage.
Discussion: § 40.12
□ Understand whether the reinsurance contract wording (in many
cases the definition of “allocated loss expenses”) obligates the
reinsurer to reimburse its cedent for declaratory judgment ex-
penses.
Discussion: § 40.13
□ Understand the coverage provided by excess of policy limits
40-12
Understanding Reinsurance 40.03
Discussion: § 40.14
Forms: §§ 40.42-40.43
□ Understand the duty of utmost good faith that is central to the
relationship between cedent and reinsurer.
Discussion: § 40.15
□ If your client is the cedent, determine the facts that must be
disclosed during the underwriting process.
Discussion: § 40.15
□ If your client is the cedent, ensure that all proper and businesslike
steps are taken in underwriting the underlying business and in
settling claims.
Discussion: § 40.16[2]
□ Understand the effect of follow the fortunes or follow the settle-
ments wording in the reinsurance contract.
Discussion: § 40.17
Discussion: § 40.19
□ Understand the obligations of the reinsurance intermediary.
Discussion: § 40.20
□ Determine whether, and for what purposes, the reinsurance broker
or intermediary is the agent of the ceding company, the reinsurer,
or both parties.
Discussion: § 40.21
Form: § 40.44
40-13
40.03 New Appleman Insurance Practice Guide
Discussion: § 40.22
Forms: §§ 40.45-40.46
□ In drafting reinsurance agreements, counsel should determine
whether the scope of the arbitration clause in the reinsurance
contract is intended to be broad or narrow.
Discussion: § 40.22
Forms: §§ 40.45-40.46
□ Arbitration counsel should consider whether non-signatories to the
arbitration agreement may be forced to arbitrate.
Discussion: § 40.22
□ Consider whether or not to include consolidation and joinder
provisions in an arbitration agreement, or whether to request
consolidation once arbitration has commenced.
Discussion: § 40.22
Form: § 40.45
□ Consider what procedures should be included in the arbitration
provision concerning the selection of arbitrators and/or umpires,
what qualifications the arbiters should have, and whether the
arbiters should be neutral or non-neutral.
Discussion: § 40.23
□ Make certain that your client appoints its arbiter on a timely basis.
Discussion: § 40.23
□ Become familiar with the standards and procedures for selecting
arbitrators and the lists of qualified individuals published by
arbitration and reinsurance organizations.
Discussion: § 40.23
Form: § 40.47
□ Understand the effect of any honorable engagement wording in the
40-14
Understanding Reinsurance 40.03
reinsurance agreement.
Discussion: § 40.24
Form: § 40.46
□ Counsel drafting a reinsurance contract should determine whether
specific discovery procedures should be included in the reinsur-
ance contract’s arbitration provision and, if so, whether they
should incorporate any procedures published by reinsurance or
arbitration organizations.
Discussion: § 40.25
□ Counsel should determine how and whether a reinsurance inter-
mediary can be required to participate in the discovery process in
the event of a reinsurance arbitration.
Discussion: § 40.25
□ Arbitration counsel should consider whether to submit a motion
for summary disposition of a reinsurance claim or dispute.
Discussion: § 40.26
□ Arbitration counsel should consider whether to move to confirm a
favorable arbitration award in court.
Discussion: § 40.28
□ Arbitration counsel should consider whether grounds exist to
move to vacate an arbitration award in court.
Discussion: § 40.28
□ Arbitration counsel should consider whether there are grounds to
request a court to modify or correct an arbitral award.
Discussion: § 40.28
□ Become familiar with the forms provided by ARIAS.
Discussion: § 40.29
Form: § 40.47
40-15
II. APPRECIATING PURPOSE OF REINSURANCE.
40.04[1] Facultative vs. Treaty. There are two basic types of reinsur-
ance: “treaty” and “facultative.” Facultative reinsurance is a contract
only covering all or part of a single specific policy of insurance. For
each transaction sought to be reinsured, the reinsurer reserves the
“faculty” to accept or decline all or part of any insurance policy
presented, and the cedent chooses whether to secure reinsurance for
a particular policy. The reinsurer and cedent negotiate the terms for
each facultative certificate. Facultative reinsurance is commonly
purchased for large, unusual or catastrophic risks. Reinsurers thus
must have the necessary resources to underwrite individual risks
carefully. (“Treaty” reinsurance, discussed further below, involves a
preexisting commitment by the reinsurer to cover a predetermined
class and amount of coverage that will be sold by the insurer-cedent.)
Other uses of facultative reinsurance include:
1. When an insurer is offered a risk that exceeds its standard
underwriting or reinsurance limits for that class, facultative
reinsurance can permit the ceding company to accept the risk.
2. Insurers can fill gaps in coverage caused by reinsurance treaty
exclusions by seeking separate facultative coverage for a
specific policy or group of policies.
3. A reinsurer can issue facultative reinsurance to participate in a
market in the short term to minimize risk and take advantage
of favorable rates.
4. A treaty reinsurer may purchase facultative reinsurance to
protect itself and its treaty reinsurers.
Insurers sometimes purchase both facultative and treaty reinsurance
to cover the same risk. Unless there are contract terms to the contrary,
the facultative reinsurance will perform first and completely before
any of the treaty reinsurance performs. Sometimes the facultative
reinsurance only applies to the ceding company’s net retention; other
times facultative coverage also inures to the benefit of the treaty
reinsurers. Ideally, the wording of the facultative certificate will make
this clear. As a general matter, whether the facultative reinsurance
inures to the benefit of the treaty reinsurers will depend on whether
the treaty reinsurers paid a portion of the premium for the facultative
40-16
Understanding Reinsurance 40.04[1]
coverage. If not, the facultative reinsurance likely will not inure to the
treaty reinsurers’ benefit.
Facultative certificates are often one or two page documents. The
front of a typical contract identifies the parties, the underlying
policyholder and policy number reinsured, amounts of the policy
ceded and retained, the type of reinsurance (proportional or non-
proportional) and the premium. The back of each certificate usually
contains the following provisions: notice of loss; net retention;
coverage for loss adjustment expenses; claims handling; cancellation;
insolvency; tax; offset and intermediaries. Many facultative certifi-
cates do not include an arbitration provision [see § 40.22 below for a
discussion of arbitration clauses in reinsurance agreements].
Treaty reinsurance, the most common form of reinsurance, covers
some portion of a defined class of an insurance company’s business
(e.g., an insurer’s products liability or property book of business).
Reinsurance treaties cover all of the risks written by the ceding
insurer that fall within their terms unless exposures are specifically
excluded. Thus, in most cases, neither the cedent nor the reinsurer
has the “faculty” to exclude from a treaty a risk that fits within the
treaty terms. Therefore, treaty reinsurers rely heavily on the cedent’s
underwriting. Treaty relationships are often long-term; treaties some-
times are renewed automatically unless a change in terms is re-
quested. A typical treaty can include thirty or forty articles or clauses
which describe the class or classes of business covered, the type of
treaty (proportional or non-proportional), the amount of reinsurance
provided and details about the parties’ obligations with respect to
treaty operation.
throughs more often are agreed ex ante, that is, when the policy is
placed, and assumptions occur when the cedent effects a loss-
portfolio transfer to a reinsurer by which the reinsurer steps into its
shoes inter sese. The assumption must be an explicit written assump-
tion of liability to the original policyholder who acquires a direct
right of action against the reinsurer; note that since the assumption
takes place on only one side of the transaction, it is not a “novation,”
freeing the original contracting party from its contractual duties; it is
not fictive, however, which is why the direct insured often will be
permitted to elect to pursue either the original party in privity or the
assumption reinsurer. Many state statutes permit reinsurers to enter
into cut-through endorsements. [Cal. Ins. Code § 922.2; N.Y. Ins.
Code § 1308(a)(2)(B); Tex. Ins. Code § 493.055]. This right has been
recognized by many courts as well [Martin Ins. Agency, Inc. v.
Prudential Reinsurance Co., 910 F.2d 252-53 (5th Cir. 1990) (interpret-
ing Louisiana law); Bruckner-Mitchell, Inc. v. Sun Indem. Co., 82 F.2d
434, 444 (D.C. Cir. 1936); Klockner Stadler Hurter, Ltd. v. Ins. Co. of
Pennsylvania, 785 F. Supp. 1130, 1134 (S.D.N.Y. 1990)].
40-29
III. CONSIDERING REINSURANCE REGULATION.
40.06 Credit for Reinsurance. Credit for reinsurance laws constitute a key
component of the regulation of reinsurance in the United States. These
laws determine the circumstances in which a ceding insurer can take
financial statement credit for reinsurance recoverables as an asset and as a
reduction of its unearned premium and loss reserves on account of
reinsurance ceded. Where an insurer can take credit for reinsurance, it can
increase its “surplus” and thus expand its allowed capacity to write new
insurance business. In order to qualify for financial statement credit, most
states require that the reinsurer be licensed or accredited in the same state
where the direct insurer does business, or that the reinsurer be domiciled
and licensed in a state that employs substantially similar credit for
reinsurance standards to those imposed by the direct insurer’s state of
domicile. Most states also allow credit for reinsurance ceded to a non-
United States reinsurer that maintains a trust fund in the U.S. for the
protection of its U.S. ceding insurers. In addition, the reinsurance contract
must actually materially transfer risk from the cedent to the reinsurer and
include an insolvency clause [see § 40.08 below for a discussion of the
insolvency clause]. Some states also require that the reinsurer assume all
credit risks of any intermediary receiving payments [N.Y. Comp. Codes R.
& Regs. tit. 11, § 125.6].
* * *
(14) Reinsurance recoverable by a ceding insurer: (i) from an insurer
authorized to transact such business in this state, except from a captive
insurance company licensed pursuant to the provisions of article seventy of
this chapter, in the full amount thereof; (ii) from an accredited reinsurer . . .
to the extent allowed by the superintendent on the basis of the insurer’s
compliance with the conditions of any applicable regulation; or (iii) from an
insurer not so authorized or accredited or from a captive insurance company
licensed pursuant to the provisions of article seventy of this chapter, in an
amount not exceeding the liabilities carried by the ceding insurer for
amounts withheld under a reinsurance treaty with such unauthorized insurer
or captive insurance company licensed pursuant to the provisions of article
seventy of this chapter as security for the payment of obligations thereunder
if such funds are held subject to withdrawal by, and under the control of, the
ceding insurer” [N.Y. Ins. Law § 1301].
Comm’r of Cal., 656 F.2d 491 (9th Cir. 1982) (applying California law);
Skandia Am. Reinsurance Corp. v. Schneck, 441 F. Supp. 715 (S.D.N.Y.
1977) (applying New York law)].
40-36
IV. CONSIDERING INSURER’S OBLIGATIONS TO REINSURERS IN
CASE OF CLAIM.
F.2d 15, 18-19 (1st Cir. 1985) (applying Massachusetts law); Allstate
Ins. Co. v. Employers Reinsurance Corp., 441 F. Supp. 2d 865, 875
(N.D. Ill. 2005), citing INA Ins. Co. of Ill. v. City of Chi., 379 N.E.2d
34, 36 (Ill. App. Ct. 1978) (applying Illinois law); Highlands Ins. Co.
v. Employers’ Surplus Lines Ins. Co., 497 F. Supp. 169, 171-73 (E.D.
La. 1980) (applying Texas law)]. These cases thus construe the
notice provision as a condition precedent to performance.
Exception: The Ninth Circuit has stated that, even where notice
is denominated a condition precedent, the reinsurer still must
demonstrate prejudice to be relieved of liability [Nat’l Am. Ins.
Co. v. Certain Underwriters at Lloyd’s London, 93 F.3d 529, 539
(9th Cir. 1996) (applying California law)].
Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 141 (N.D. Ill. 1993)].
involved in the adjustment of a claim but also obligate the cedent to confer
with and secure the agreement of the reinsurer to settle claims of certain
types or amounts in order to be indemnified. In the U.S. market, counsel
and concur provisions are usually found in clauses that provide excess
limits and extra-contractual (“ECO”) coverage [see § 40.14 below for a
general discussion of the reinsurer’s obligation to reimburse the cedent for
these types of losses]. Some clauses go further still and give the reinsurer
broad authority over claims handling.
A cedent’s failure to provide the notice required by a claims cooperation
clause can arguably provide a defense to coverage [Liberty Mut. v. Gibbs,
773 F.2d 15, 17-18 (1st Cir. 1985); see § 40.09 above for a complete
discussion of the cedent’s notice obligations and the consequences of a
breach of this obligation]. Similarly, a cedent’s failure to comply with the
terms of a claims control clause may provide an affirmative defense to a
claim for payment [Certain Underwriters at Lloyd’s London v. Home Ins.
Co., 783 A.2d 238, 239-242 (N.H. 2001); Argonaut Ins. Co. v. Certain
London Mkt. Reinsurers, No. 03-317805 (Cal. Super. Ct. Nov. 13, 2006),
reported in Mealey’s Litigation Report: Reinsurance, Vol. 17, No. 15 at A-4].
However, denial of coverage for a violation of the right to associate may
not succeed if the reinsurer cannot show that it was prejudiced and the
cedent did not act in bad faith [see N. River Ins. Co. v. Cigna Reinsurance
Co., 52 F.3d 1194, 1216 (3d Cir. 1995); Unigard Sec. Ins. Co. v. N. River Ins.
Co., 4 F.3d 1049, 1068-70 (2d Cir. 1993)].
40-61
V. CONSIDERING REINSURER’S OBLIGATIONS.
Example: A reinsurer was not liable to cover a payment for lost cargo
under a facultative certificate where the loss was due to a “shore risk”
because “the defendant never consented to reinsure this loss not
covered in the original insurance policy” [Ins. Co. of N. Am. v. U.S. Fire
40-62
Understanding Reinsurance 40.12
Ins. Co., 322 N.Y.S.2d 520, 524 (N.Y. Sup. Ct. 1971)].
hereunder is payable pro rata with the reinsured and at the same time
and place” [British Int’l Ins. Co. v. Seguros La Republica, S.A., 2001
U.S. Dist. LEXIS 11453, at *2 (S.D.N.Y. 2001)]. On appeal, the court
rejected the reinsured’s argument that the certificates were ambiguous
with respect to recovery of declaratory judgment expenses because the
word “expenses” did not appear anywhere in the certificates [British
Int’l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 82-83 (2d Cir.
2003)].
their insureds will not be resolved within applicable policy limits follow-
ing the cedent’s unreasonable failure to effect a settlement or that bad faith
claims will be directed at the cedent’s conduct in handling the insured’s
claim for coverage. Inclusion of XPL and ECO clauses removes the
uncertainty as to whether such losses will be covered under the reinsur-
ance contract.
An XPL clause specifically provides coverage for losses in excess of the
policy limits in the insurance policy issued by the cedent to its policy-
holder and typically appears in reinsurance treaties covering liability
business. An XPL clause covers payment by a cedent arising from a
judgment against its insured in excess of the reinsured’s policy limits, but
otherwise covered, where the size of the judgment was affected by the
cedent’s negligence, fraud or bad faith in handling the claim or in the
settlement or defense of the lawsuit against the insured. The reinsurance
contract usually limits the amount paid by a reinsurer on an XPL claim to
an amount within the overall reinsurance limit. An XPL clause is not
intended to cover amounts the cedent is found liable to pay directly to its
insured as compensation or punitive damages due to its own misconduct
to its insured, rather than indirectly on account of its failure to resolve the
policyholder’s liability to others. [See § 40.44 for an example of an XPL
clause included in a reinsurance treaty.]
An ECO clause is similar to an XPL clause in that it covers the liability of
the cedent due to mishandling or defense of claims but it focuses on the
cedent-insurer’s obligation to act in good faith relative to its own insured.
By definition, extra-contractual obligations incurred by the cedent are
“extra” or outside the coverage provided by the policy. For example, ECO
clauses can provide for indemnification of payments to an insured for
punitive damages and emotional distress caused by the cedent’s tortious
conduct or failing to treat the insured fairly and in good faith. [See § 40.43
for an example of an ECO clause.] In addition, an ECO clause may be
drafted to cover a ceding insurer’s exposure when its insured is found
liable to a third party for punitive damages, though this may be more
probably understood as an XPL exposure.
40-68
VI. CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE
FIDEI.
the value of the risks” [Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485,
510 (1883)].
A fact will be deemed “material” if it “would have either prevented a
reinsurer from issuing a policy or prompted a reinsurer to issue it at a
higher premium” had it been disclosed before the reinsurance contract
was executed [Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d.
at 279; In re Liquidation of Union Indem. Ins. Co. of N.Y., 674 N.E.2d 313,
320 (N.Y. 1996)]. Disclosure is required, for example, “[w]here the rein-
sured has offered extended coverage or an unusual term” [Sumitomo
Marine & Fire Ins. Co. v. Cologne Reinsurance Co., 552 N.E.2d 139, 143
(N.Y. 1990)].
The following are additional types of information that have been found to
be material to the underwriting process:
• The premium rate, volume or sufficiency;
• Prior significant losses or legal actions against the insured;
• The underwriting agent’s role;
• The geographical spread of the underlying risks; and
• The type of business ceded.
The duty of utmost good faith also applies to the relationship between a
retrocedent and its retrocessionaire [Compagnie de Reassurance D’Ile de
France v. New England Reinsurance Corp., 57 F.3d 56, 66-70 (1st Cir.
1995)].
Whether the reinsurance intermediary is an agent of the cedent or the
reinsurer is a fact based inquiry. Under typical circumstances, the inter-
mediary is the agent of the ceding company. Hence, a reinsurance
intermediary may be held to be the agent of the ceding company in terms
of the representations made to the reinsurer during the reinsurance
placement process [see Old Reliable Fire Ins. Co. v. Castle Reinsurance Co.,
Ltd., 665 F.2d 239 (8th Cir. 1981); Calvert Fire Ins. Co. v. Unigard Mut. Ins.
Co., 526 F. Supp. 623 (D. Neb. 1980)].
Example: Where the ceding insurer had no reason to believe that its
reinsurer would consider the direct insured’s distribution of ATV’s
material to the nature of the risk because the insurer itself did not view
it as such when the reinsurance contract incepted, the failure to
disclose this information did not deprive the reinsurer of the same
opportunity the cedent had to assess the risk, and the reinsurer’s
misrepresentation claim was properly dismissed [Christiania Gen. Ins.
Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992)].
Consider: In some states, the duty to disclose all material facts to the
reinsurer is required by statute [see Cal. Ins. Code § 622].
Cir. 1993)]. Instead, the appropriate standard for bad faith in these
circumstances is deliberate deception, gross negligence or reckless-
ness [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d at 1069].
Lloyd’s London, 1991 U.S. Dist. LEXIS 12948, at * 18, 36 (N.D. Ill.
1991)].
40-76
VII. CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE
SETTLEMENTS.
40.17 Understand Distinction Between Follow the Fortunes and Follow the
Settlements. The duty of utmost good faith inherent in all reinsurance
relationships extends beyond contract placement and includes the claims-
handling process [for a discussion of the duty of utmost good faith, see
§§ 40.15 and 40.16 above]. The parties’ continued good faith is manifested
in the “follow the fortunes” and “follow the settlements” doctrines.
“Follow the fortunes” and “follow the settlements” clauses have been
interpreted to embody the principle that a reinsurer will indemnify its
cedent for any losses arguably within the terms of the underlying policy,
as long as the cedent has not acted in bad faith. The provisions operate
primarily for the benefit of cedents, allowing them some measure of
certainty in calculating expected reinsurance recoveries and discouraging
reinsurers from challenging a cedent’s coverage decisions and the amount
of any settlement. If the follow the fortunes/settlements doctrine did not
apply, there would be no reinsurance liability unless a claim was expressly
covered under the direct policy. If the ceding insurer settled a coverage
dispute and the reinsurer denied liability, the coverage case likely would
have to be tried again.
Although many U.S. court decisions fail to distinguish between following
fortunes and following settlements [see, e.g., Nat’l Am. Ins. Co. of Cal. v.
Certain Underwriters at Lloyd’s, London, 93 F.3d 529, 535 n.15 (9th Cir.
1996); N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199, 1205
(3d Cir. 1995); Houston Cas. Co. v. Lexington Ins. Co., 2006 U.S. Dist.
LEXIS 45027, at *9 n.8 (S.D. Tex. June 15, 2006)], there is a meaningful
distinction between the two concepts. As one court explained: “[t]he
’follow the fortunes’ doctrine requires reinsurers to accept a reinsured’s
good faith decision that a particular loss is covered by the terms of the
underlying policy, while the ’follow the settlements’ doctrine requires
reinsurers to abide by a reinsured’s good faith decision to settle, rather
than litigate, claims on that policy” [Commercial Union Ins. Co. v. Seven
Provinces Ins. Co., Ltd., 9 F. Supp. 2d 49, 66 (D. Mass. 1998)]. The phrases
are often used interchangeably, but “the term ’follow the fortunes’ more
accurately describes the reinsurer’s obligation to follow the reinsured’s
underwriting fortunes, whereas ’follow the settlements’ refers to the duty
to follow the actions of the reinsured in adjusting and settling claims” [N.
River Ins. Co. v. Employers Reinsurance Corp., 197 F. Supp. 2d 972, 978 n.1
(S.D. Ohio 2002)].
40-77
40.17 New Appleman Insurance Practice Guide
cedent failed to produce evidence to support its claim that custom and
practice in the reinsurance industry dictates that “follow the settlements”
is implied in a reinsurance contract even absent an express provision to
that effect, “follow the settlements” provision cannot be read into a
certificate of facultative reinsurance contract as a matter of law)].
Follow the fortunes and settlement obligations also apply to a retroces-
sionaire in its agreements with a retrocedent [Am. Bankers Ins. Co. of Fla.
v. Nw. Nat’l Ins. Co., 198 F.3d 1332 (11th Cir. 1999)].
Disputes frequently arise regarding the scope of the obligations of a
reinsurer who has agreed to “follow the fortunes” or “follow the settle-
ments” of a cedent. Although most disputes are resolved in reinsurance
arbitrations, where the opinions are typically confidential, several courts
have published decisions considering this issue. [For examples of deci-
sions involving reinsurer’s obligations under “follow the fortunes” or
“follow the settlement” provisions, see §§ 40.18 and 40.19 below].
Example: A reinsurer was found not liable to its reinsured for payment
of its share of a settled claim, even though the reinsurance agreement
contained a “follow the settlements” clause. The court concluded that
the settled claims were not even arguably covered by the underlying
policies and that the cedent had not conducted a reasonable, business-
like investigation before paying the claims [Karen L. Suter v. Gen.
Accident Ins. Co. of Am., 2006 U.S. Dist. LEXIS 48209, at *82, 84-86
(D.N.J. 2006)].
Example: The Court of Appeals for the Eleventh Circuit found that a
reinsurer was obligated to follow the fortunes of a ceding insurer that
made a good faith determination of coverage based on existing law,
regardless of whether its decision was ultimately correct [Am. Bankers
Ins. Co. of Fla. v. Nw. Nat’l Ins. Co., 198 F.3d 1332, 1336-37 (11th Cir.
1999)]. Because there was legitimate debate at the time of payment
about whether a large group of similar claims constituted a single
occurrence, the ceding insurer’s decision to pay those claims on an
aggregate basis was not grossly negligent or reckless [id.].
“follow the fortunes” clause as having the same effect in the settlement
context as would a “follow the settlements” clause. The court deter-
mined that the cedent’s allocation of the settled claims to the reinsured
policy was “at least arguably correct, and therefore . . . could not have
been unreasonable” [Nat’l Union Fire Ins. Co. v. Am. Re-Insurance Co.,
441 F. Supp. 2d 646, 652 (S.D.N.Y. 2006)]. The court stated that the
reinsurer’s challenges to the ceding company’s allocation decisions
invite “exactly the type of inquiry [by the reinsurer and the court] that
the follow-the-fortunes doctrine is intended to prevent,” and that
permitting reinsurers to “second guess [the propriety of the cedent’s
allocation] ’would . . .make settlement impossible and reinsurance in
itself problematic”’ [id., citing Travelers Cas. & Sur. Co. v. Gerling
Global Reinsurance Corp., 419 F.3d 181, 189 (2d Cir. 2005)].
40-84
VIII. CONSIDERING BROKERED MARKET.
40.20 Brokered vs. Direct Market. Reinsurance companies are generally
known as either direct markets or brokered markets, depending on
whether the reinsurers deal directly with their cedents or deal with them
through an intermediary. Direct markets operate through salaried employ-
ees of ceding insurers and reinsurers who negotiate and bind reinsurance
contracts. In brokered markets, reinsurers assume business by dealing
with brokers or intermediaries. Whether the intermediary is the agent of
the cedent or the reinsurer or is a dual agent is determined by an
application of the facts to standard agency principles. Under typical fact
patterns, although the intermediary commission is generally paid by the
reinsurer, the intermediary is held to be the agent of the cedent [In re
Pritchard & Baird, Inc., 8 B.R. 265 (D.N.J. 1980)].
Reinsurance brokers perform many of the same functions as brokers in the
direct insurance market. Reinsurance brokers try to secure the most
advantageous terms for ceding insurers from the reinsurance marketplace.
A reinsurance broker or intermediary also may perform administrative
functions during the operation of the reinsurance agreement. Reinsurance
intermediaries often serve as a conduits for communications between
cedents and reinsurers, transmit payments, collect sums due, settle losses
and prepare periodic statements of account. Reinsurance brokers may
have functions akin to claim handlers in the gathering of information,
conveyance of attorney advice and the like concerning the submission of
claims for indemnification. Additional responsibilities may include draft-
ing reinsurance contract wording and creating complex reinsurance
programs tailored to the ceding insurer’s specific needs.
40.21 Understand Which Entity Broker Represents. The issue often arises as
to whose agent the reinsurance broker or intermediary is with respect to
a specific transaction. The general rule is that the broker or intermediary
is the agent of the ceding company, unless there are facts demonstrating
otherwise [Houston Cas. Co. v. Certain Underwriters at Lloyd’s London,
51 F. Supp. 2d 789, 799-800 (S.D. Tex. 1999); Banco Ficohsa v. Aseguradora
Hondurena, S.A., 937 So. 2d 161, 165 (Fla. Dist. Ct. App. 2006)]. Under
applicable state law principles of agency law, the specific conduct and
relationship of the parties determines the nature and extent of agency
status, and the most critical factor is control [St. Paul Fire and Marine Ins.
Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS 8916, at *18-19 (S.D.N.Y. 1997)].
Where the broker or intermediary is found to be an agent of the cedent, the
cedent may be responsible for the agent’s actions, including misrepresen-
tations [see Houston Cas. Co. v. Certain Underwriters at Lloyd’s London,
51 F. Supp. 2d 789, 802-05 (S.D. Tex. 1999); Reliance Ins. Co. v. Certain
Member Companies, 886 F. Supp. 1147, 1152-55 (S.D.N.Y. 1995); Calvert
Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 638-39 (D. Neb.
1980)].
40-86
Understanding Reinsurance 40.21
the primary insurer is the principal and the reinsurance broker its
agent, the cases do not establish this relationship as a matter of law”
[id. at *5].
Example: A reinsurance broker was the ceding insurer’s agent, and its
misrepresentation of the underlying policy’s terms was made within
the scope of its actual authority and voided the reinsurance policy
[Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F.
Supp. 2d 789, 799-805 (S.D. Tex. 1999)].
40-88
IX. CONSIDERING REINSURANCE ARBITRATION.
lying the claims “touch matters” covered by the parties’ contract, then
those claims are arbitrable [see Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth Inc., 473 U.S. 614, 625 n.13 (1985); Genesco, Inc. v. Kakiuchi &
Co., Ltd., 815 F.2d 840 (2d Cir. 1987)]. Appellate courts review decisions to
compel arbitration de novo [Sphere Drake Ins. Ltd. v. Clarendon Nat’l Ins.
Co., 263 F.3d 26, 29 (2d Cir. 2001)], but such review may not be available
on an interlocutory basis.
Courts can sever arbitrable claims from nonarbitrable claims. When a
court determines that only some claims are arbitrable, it must decide
whether to stay litigation of the remaining claims pending arbitration or to
let them proceed concurrently [JLM Industries, Inc. v. Stolt-Nielsen SA,
387 F.3d 163, 169 (2d Cir. 2004) (citation omitted); Benson v. Lehman Bros.,
Inc., 2005 U.S. Dist. LEXIS 8542, at *4-5 (S.D.N.Y. May 9, 2005) (citation
omitted)]. [For a discussion of when courts stay litigation pending
arbitration, see New York Insurance Law, § 15.08[2] (Walcott B. Dunham,
Jr., ed.).] If factual questions on which the non-arbitrable claim turns may
be resolved in the arbitration, courts typically stay the non-arbitrable
claim.
Absent a contract provision to the contrary, questions of mere delay, laches
and untimeliness raised to defeat arbitration are generally issues of
procedural arbitrability reserved for resolution by the arbitrator [Glass v.
Kidder, Peabody & Co., Inc., 114 F.3d 446, 454-56 (4th Cir. 1997); All Am.
Termite & Pest Control, Inc. v. Albert Bedford Walker, 830 So. 2d 736, 739
(Ala. 2002); Amtower v. William C. Roney & Co., 590 N.W.2d 580, 583
(Mich. Ct. App. 1998); but see In the Manner of Donaldson Acoustics, Inc.
v. N.Y. Inst. of Tech., 671 N.Y.S.2d 114, 115 (N.Y. Sup. Ct. 1998)].
Another issue that most courts have found to be within the purview of the
arbitration panel, unless the parties’ agreement provides otherwise, is
whether or not arbitrable disputes can be consolidated, that is, whether
arbitration under separate contracts can be resolved in a single proceeding
[Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 581
(7th Cir. 2006); Shaw’s Supermarkets, Inc. v. United Food & Commercial
Workers Union, 321 F.3d 251, 254-55 (1st Cir. 2003); Markel Int’l Ins. Co. v.
Westchester Fire Ins. Co., 442 F. Supp. 2d 200, 203-05 (D.N.J. 2006), aff’d
Certain Underwriters at Lloyd’s London. v. Westchester Fire Ins. Co., 2007
U.S. App. LEXIS 13714 (3d Cir. 2007)].
GMBH, 206 F.2d 411, 416-18 (4th Cir. 2000); Thomson-CSF, S.A. v. Am.
Arbitration Ass’n, 64 F.3d 773, 776 (2d Cir. 1995); but see Grundstad v. Ritt,
106 F.3d 201, 204-05 (7th Cir. 1997)].
The right to arbitrate a dispute may be waived if a party fails to comply
with the terms of the arbitration agreement, excessively delays commenc-
ing arbitration or takes action that is inconsistent with the arbitral process
[see Gen. Star Nat’l Ins. Co. v. Administratia Asigurarilor De Stat, 289 F.3d
434, 438 (6th Cir. 2002); Menorah Ins. Co. v. INX Reinsurance Corp., 72 F.3d
218, 221-22 (1st Cir. 1995); Kramer v. Hammond, 943 F.2d 176, 179-80 (2d
Cir. 1991)]. If a party waits while a matter is being litigated to assert a right
to arbitrate, the court may find it to be estopped from asserting the
arbitration clause if the litigation has proceeded substantially.
Example: Some courts have found that inclusion of the phrase “arbi-
tration clause” in an executed placement slip or cover note constitutes
evidence of a binding agreement to arbitrate [Zurich Am. Ins. Co. v.
Cebcor Serv. Corp., 2003 U.S. Dist. LEXIS 10346, at *6-11 (N.D. Ill.
2003); Guarantee Trust Life Ins. Co. v. Am. United Life Ins. Co., 2003
U.S. Dist. LEXIS 22777, at *7-8 (N.D. Ill. Dec. 18, 2003) (applying
Pennsylvania law); but see Frank B. Hall Co. of Colo. v. Colo. Sch. Dists.
Self-Insurance Pool, No. 92 CV 225 (Colo. Dist. Ct., City and Co. of
Denver Mar. 26, 1997), reported in Mealey’s Litigation Reports: Rein-
surance, Vol. 3, No. 24 at D].
12521, at *7-8 (N.D. Ill. 1990); Employers Ins. of Wausau v. Jackson, 527
N.W.2d 681, 688-89 (Wis. 1995)]. Some courts have been reluctant,
however, to find that a party making an untimely selection forfeited its
appointment right, unless the parties expressly made time of the
essence in the contract’s arbitration provision [see Ancon Ins. Co.
(U.K.) v. GE Reinsurance Corp., 2007 U.S. Dist. LEXIS 24822, at *23-24
(D. Kan. 2007); RLI Ins. Co. v. Kansa Reinsurance Co., 1991 U.S. Dist.
LEXIS 16388, at *9 (S.D.N.Y. 1991); New England Reinsurance Corp. v.
Tenn. Ins. Co., 780 F. Supp. 73, 77-78 (D. Mass. 1991)].
z Strategic Point: The parties can dispense with some of the back and
forth in the appointment of arbitrators and umpires by agreeing to a
process — or a joint list of candidates — at the time their dispute
ripens.
agreement often does not require that the arbitrators be trained in the law
[see U.S. Life Ins. Co. v. Ins. Comm’r of the State of Cal., 2005 U.S. App.
LEXIS 25763, at *7-8 (9th Cir. 2005) (unpublished decision); Nw. Nat’l Ins.
Co. v. Generali Mex. Compania De Seguros, S.A., 2000 U.S. Dist. LEXIS
7348, at *4 (S.D.N.Y. 2000); Employers Ins. of Wausau v. Certain Under-
writers at Lloyd’s London, 552 N.W.2d 420, 427 n.8 (Wis. Ct. App. 1996);
for a discussion of the rare circumstances under which arbitral awards
may be vacated under the “manifest disregard of the law” standard, see
§ 40.28 below]. Instead, they may, and often do, apply industry custom
and practice as well as equitable principles to reach their decisions. Unless
the contract provides otherwise, arbitrators in U.S. arbitrations are not
obligated to issue a reasoned decision explaining the award. [For a
discussion of reasoned awards in reinsurance arbitrations, see § 40.27
below].
available at http://www.abanet.org/buslaw/newsletter/0008/adr/
adr101.pdf; see also John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557
(1964)]. The revised Uniform Arbitration Act (the “UAA”) expressly
permits arbitrators to decide a request for summary disposition based
solely on documentation, after a party submitting the request gives notice
and opposing parties have a reasonable time to respond [see UAA § 15(b)
(2000), available at http://www.nccusl.org]. The Procedures for the Reso-
lution of U.S. Insurance and Reinsurance Disputes issued by the Insurance
and Reinsurance Dispute Resolution Task Force also specifically authorize
consideration of summary disposition motions by reinsurance arbitration
panels [Reinsurance Ass’n of America, Procedures for the Resolution of
U.S. Insurance and Reinsurance Disputes § 13.1 (2004)]. In addition, the
American Arbitration Association (“AAA”) Commercial Arbitration Rules
give arbitrators wide latitude to conduct the proceedings and do not
prohibit the use of dispositive motions. The AAA Procedures for Large,
Complex Commercial Disputes also appear to permit summary adjudica-
tion by allowing arbitrators to “take such steps as they may deem
necessary or desirable to avoid delay and to achieve a just, speedy and
cost-effective resolution” of the cases [American Arbitration Ass’n, Com-
mercial Arbitration Rules and Mediation Procedures R-30(b) (2005);
American Arbitration Ass’n, Procedures for Large, Complex Commercial
Disputes L-4(a) (2005)].
Parties may agree upon appropriate procedures by contract, but where
they do not, arbitrators have wide discretion to decide procedural matters
and determine the meaning of procedural rules [see Bell Atlantic-
Pennsylvania, Inc. v. Communications Workers of Am., Local 13000, 164
F.3d 197, 201-02 (3d Cir. 1999); Raytheon Co. v. Computer Distrib., Inc., 632
F. Supp. 553, 557-58 (D. Mass. 1986); for a discussion of arbitrators’
freedom to dispense with judicial formalities and determine arbitration
procedures, see § 40.23 above]. Consistent with the goals of speed and
efficiency in arbitration, arbitrators are encouraged to take appropriate
action to simplify and expedite proceedings [see PaineWebber Group, Inc.
v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 995 (8th Cir. 1999); Cearfoss
Constr. Corp. v. Sabre Constr. Corp., 1989 U.S. Dist. LEXIS 9639, at *12-13
(D.D.C. Aug. 10, 1989)]. Unless otherwise restricted, this mandate leaves
arbitrators free to consider and grant motions for summary adjudication
of issues or summary judgment
The power of arbitrators to grant summary disposition may be restricted,
however, by arbitration agreements that expressly limit such authority.
The FAA requires courts to enforce privately negotiated agreements to
arbitrate, like other contracts, in accordance with their terms, and parties
may stipulate by contract the rules under which their arbitration will be
40-105
40.26 New Appleman Insurance Practice Guide
conducted [see Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52,
57 (1995); Baravati v. Josephthal, Lyon & Ross, Inc. 28 F.3d 704, 709 (7th Cir.
1994)]. Arbitrators generally are required to follow any procedures set
forth in the parties’ agreement [W. Employers Ins. Co. v. Jeffries & Co., 958
F.2d 258, 262 (9th Cir. 1992)]. Therefore, a contract provision prohibiting
summary adjudication in the arbitration proceeding most likely precludes
such action.
The authority of arbitrators to decide motions for summary disposition is
usually litigated in court proceedings to vacate or confirm the award.
Generally, there are very limited grounds for courts to vacate arbitral
awards under the FAA, the Convention on the Recognition and Enforce-
ment of Foreign Arbitral Awards (the “New York Convention”) and state
arbitration acts. [For a discussion of the circumstances under which courts
vacate arbitral awards, see § 40.28 below]. Challenges to an arbitration
panel’s decision to grant a motion for summary disposition typically fall
into two categories. Parties contend that the arbitrators lacked the
authority to grant the dismissal motion (exceeded their powers) or assert
that the panel engaged in misconduct by improperly refusing to hear
evidence. Courts have made clear that misbehavior cognizable under
Section 10(a)(3) of the FAA “must amount to a denial of fundamental
fairness of the arbitration proceeding” in order to justify overturning an
award” [Max Marx Color & Chem. Co. Employees’ Profit Sharing Plan v.
Barnes, 37 F. Supp. 2d 248, 252 (S.D.N.Y. 1999)]. In the cases confirming
summary decisions, courts agreed with the arbitrators that an evidentiary
hearing was not necessary because any excluded evidence either was
duplicative or not material to the issues in dispute [see Hudson v. ConAgra
Poultry Co., 2007 U.S. App. LEXIS 7681, at *19-20 (8th Cir. 2007); Sheldon
v. Vermonty, 269 F.3d 1202, 1207 (10th Cir. 2001); Pegasus Constr. Corp. v.
Turner Constr. Co., 929 P.2d 1200, 1201-03 (Wash. Ct. App. 1997)].
Alternatively, courts vacating summary awards determined that summary
adjudication was inappropriate because the arbitrators’ failure to receive
pertinent evidence resulted in palpable prejudice to a party [see Int’l
Union, United Mine Workers of Am. v. Marrowbone Dev. Co., 232 F.3d
383, 387-90 (4th Cir. 2000); Prudential Sec., Inc. v. Dalton, 929 F. Supp. 1411,
1417-18 (N.D. Okla. 1996)]. Vacatur will not be granted simply because the
court might have come to a different result.
arbitration panel need not set forth the rationale supporting its award,
unless the parties’ arbitration agreement requires it to do so [N.Y. Stock
Exch. Arbitration between Fahnestock & Co., Inc. v. Waltman, 935 F.2d 512,
516 (2d Cir. 1991); Koch Oil, S.A. v. Transocean Gulf Oil Co., 751 F.2d 551,
554 (2d Cir. 1985)]. Thus, many arbitral decisions are presented in a brief
statement outlining the nature of the dispute, stating the prevailing party
and describing any relief awarded. The parties may, however, require the
reinsurance arbitration panel to explain the reasoning for an award as a
pre-requisite for being appointed to the panel.
direct business relationship with one of the parties that calls into
question his or her neutrality [see Commonwealth Coatings Corp. v.
Cont’l Cas. Co., 393 U.S. 145, 146-48 (1968); Sphere Drake Ins. Ltd.
v. All Am. Life Ins. Co., 307 F.3d 617, 621-23 (7th Cir. 2002); Hobet
Mining, Inc. v. Int’l Union, United Mine Workers, 877 F. Supp. 1011,
1021 (S.D. W. Va. 1994)]. Nondisclosure sufficient to vacate an
award usually creates a concrete, and not merely speculative,
impression of bias [see Positive Software Solutions, Inc. v. New
Century Mortgage Corp., 476 F.3d 278, 286 (5th Cir. 2007); Nation-
wide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th Cir.
2002); Gianelli Money Purchase Plan and Trust v. ADM Investor
Servs., Inc., 146 F.3d 1309, 1312-13 (11th Cir. 1998)]. Some courts
have stated that “evident partiality” is present when a reasonable
person would conclude that the arbitrator acted with partiality (but
mere unhappiness in or disagreement with the outcome is not
equated with the arbitrator’s having acted in a partial manner)
[Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1523 n.30 (3d Cir.
1994), (citations omitted); Lourdes Med. Ctr. of Burlington County
v. Jnesco, 2007 U.S. Dist. LEXIS 25458, at *24-25 (D.N.J. 2007);
Vigorito v. UBS Painewebber, Inc., 477 F. Supp. 2d 481, 486-87 (D.
Conn. 2007)].
• “Where the arbitrators were guilty of misconduct in refusing to
postpone the hearing, upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy; or of any
other misbehavior by which the rights of any party have been
prejudiced” [9 U.S.C. § 10(a)(3)]. Arbitrators are accorded wide
latitude in conducting hearings and are not constrained by formal
rules of procedure or evidence [Robbins v. Day, 954 F.2d 679, 685
(11th Cir. 1991); for discussions of arbitrators’ broad powers to
conduct proceedings, see §§ 40.24, 40.25 and 40.26 above]. They
may simplify and expedite proceedings, and they are not bound to
hear all of the evidence tendered by the parties [PaineWebber
Group, Inc. v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 995 (8th Cir.
1999); Robbins v. Day, 954 F.2d 679, 685 (11th Cir. 1992)]. Therefore,
an arbitral award will not be vacated unless an error in the arbitral
misconduct deprived a party of a fundamentally fair hearing [El
Dorado Sch. Dist. #15 v. Cont’l Cas. Co., 247 F.3d 843, 847-48 (8th
Cir. 2001); Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir.
1997)].
• “Where the arbitrators exceeded their powers, or so imperfectly
executed them that a mutual, final and definite award upon the
subject matter submitted was not made” [9 U.S.C. § 10(a)(4)]. The
40-110
Understanding Reinsurance 40.28
Example: The federal District Court for the District of the Virgin Islands
affirmed vacatur of an arbitral award where the arbitrator failed to
postpone the hearing after a party submitted an amended arbitration
claim and voluminous supporting documentation 24 hours before the
scheduled hearing and denied the opposing party a continuance to
investigate the amended claim [Coastal Gen. Constr. Servs., Inc. v.
Virgin Islands Hous. Auth., 238 F. Supp. 2d 707, 708-10 (D.V.I. 2002)].
award to conform the amount of the written award to the amount the
panel had verbally announced [Nationwide Mut. Ins. Co. v. First State
Ins. Co., 213 F. Supp. 2d 10, 14-16 (D. Mass. 2002)]. A federal district
court remanded the case to the arbitrators with directions to reopen
the proceedings and correct an acknowledged material miscalculation
[Laurin Tankers Am., Inc. v. Stolt Tankers, Inc., 36 F. Supp. 2d 645,
652-53 (S.D.N.Y. 1999)]. All of these decisions are motivated by a
decision to correct an obvious clerical error, rather than to change the
relationship between the arbitrating parties following the arbitration
award.
try this source: Global Reinsurance. Enter specific search terms or date
ranges.
40-114
X. FORMS.
Use of Form: The wording stipulating the quota share terms is typically
set forth in the contract’s “Reinsuring Clause,” “Limit and Retention”
or “Limit of Liability” clause. Several forms are reprinted from the
Brokers and Reinsurance Markets Association (“BRMA”) Contract
Reference Book, available at http://www.brma.org/frommembers/
frommemcontractwd01.htm.
B
C
A policy written on an installment premium, report from or continuous
basis shall be considered renewed as of the end of each annual period
commencing with the caption date of the policy.
The term “policies” as used herein means the Company’s binders, policies
and contracts providing insurance and reinsurance on the lines of business
covered under this Contract.
Use of Form: This form applies only to a reinsurer that does not qualify
for full credit with any insurance regulatory authority having jurisdic-
tion over the company’s reserves. The form covers unearned premium,
outstanding losses and incurred but not reported reserves (“IBNR”).
UNAUTHORIZED REINSURANCE
As regards policies or bonds issued by the Company coming within the
scope of this Contract, the Company agrees that when it shall file with the
insurance regulatory authority or set up on its books reserves for
unearned premium and losses covered hereunder which it shall be
required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such reserves applicable to the Reinsurer. The
Reinsurer hereby agrees to fund such reserves in respect of unearned
premium, known outstanding losses that have been reported to the
40-116
Understanding Reinsurance 40.33
is in excess of the actual amount required for (a) or (c), or in the case of (d),
the actual amount determined to be due, the Company shall promptly
return to the Reinsurer the excess amount so drawn. All of the foregoing
shall be applied without diminution because of insolvency on the part of
the Company or the Reinsurer.
The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposi-
tion of funds withdrawn, except to ensure that withdrawals are made only
upon the order of properly authorized representatives of the Company.
At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement
of the Reinsurer’s Obligations, for the sole purpose of amending the Letter
of Credit, in the following manner:
(a) If the statement shows that the Reinsurer’s Obligations exceed the
balance of credit as of the statement date, the Reinsurer shall, within thirty
(30) days after receipt of notice of such excess, secure delivery to the
Company of an amendment to the Letter of Credit increasing the amount
of credit by the amount of such difference.
(b) If, however, the statement shows that the Reinsurer’s Obligations are
less than the balance of credit as of the statement date, the Company shall,
within thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the
Letter of Credit reducing the amount of credit available by the amount of
such excess credit.
from one party to the other under this Contract or any other contract
heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming reinsurer or ceding company. This
provision shall not be affected by the insolvency of either party to this
Contract.
Use of Form: This notice of loss clause incorporates the reinsurer’s right
to associate in the defense of any claim.
Use of Form: This clause specifies that prompt notice to the reinsurer is
a condition precedent to recovery.
LOSS NOTICE
As a condition precedent to recovery hereunder, the Company shall advise
the Reinsurer promptly of all losses which, in the opinion of the Company,
may result in a claim hereunder and of all subsequent developments
thereto which, in the opinion of the Company, may materially affect the
40-120
Understanding Reinsurance 40.41
Use of Form: This clause allows the reinsurer or its representative broad
access to all matters relating to the reinsurance at all reasonable times.
ACCESS TO RECORDS
The Reinsurer or its designated representatives shall have free access to
the books and records of the Company on matters relating to this
reinsurance at all reasonable times for the purpose of obtaining informa-
tion concerning this Contract or the subject matter hereof.
proceeding.
Use of Form: This clause is for use in excess of loss contracts where the
percentage of coverage provided for XPL is specified in the Ultimate
Net Loss article of the contract.
EXCESS OF ORIGINAL POLICY LIMITS
This Contract shall protect the Company, within the limits hereof, in
connection with ultimate net loss in excess of the limit of its original policy,
such loss in excess of the limit having been incurred because of failure by
it to settle within the policy limit or by reason of alleged or actual
negligence, fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its insured
or reinsured or in the preparation or prosecution of an appeal consequent
upon such action.
However, this Article shall not apply where the loss has been incurred due
to fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in
the presentation, defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word “loss” shall mean any amounts
for which the Company would have been contractually liable to pay had
it not been for the limit of the original policy.
Use of Form: This clause is for use in a reinsurance contract where the
percentage of coverage provided for ECO is specified elsewhere in the
contract. Insurance or other reinsurance recoveries, which protect the
Company for ECO, shall be deducted when determining the total ECO
loss under this reinsurance contract.
EXTRA CONTRACTUAL OBLIGATIONS
A. “Extra Contractual Obligations” are defined as those liabilities not
covered under any other provision of this Contract and which
arise from the handling of any claim on business covered here-
under, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the policy
limit, or by reason of alleged or actual negligence, fraud or bad
faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its insured or
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as may be mutually agreed. Each party shall submit its case to the
arbitrators within sixty (60) days of the selection of the third arbitrator or
within such longer period as may be agreed by the arbitrators. The
arbitrators shall not be obliged to follow judicial formalities or the rules of
evidence except to the extent required by governing law, that is, the state
of the situs of the arbitration as herein agreed; they shall make their
decisions according to the practice of the reinsurance business. The
decision rendered by a majority of the arbitrators shall be final and
binding on both parties. Such decision shall be a condition precedent to
any right of legal action arising out of the arbitrated dispute which either
party may have against the other. Judgment upon the award rendered
may be entered in any court having jurisdiction thereof.
Use of Form: The third paragraph includes the phrase “[a]ll arbitrators
shall interpret this Contract as an honorable engagement rather than as
merely a legal obligation,” which has been included in arbitration
clauses for decades and is sometimes a subject of debate among parties
to reinsurance agreements [for a discussion of the meaning and import
of “honorable engagement” language, see § 40.24].
ARBITRATION
As a precedent to any right of action hereunder, if any differences shall
arise between the contracting parties with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether arising before or after termination of this Contract, such differ-
ences shall be submitted to arbitration upon the written request of one of
the contracting parties.
Each party shall appoint an arbitrator within thirty (30) days of being
requested to do so, and the two named shall select a third arbitrator before
entering upon the arbitration. If either party refuses or neglects to appoint
an arbitrator within the time specified, the other party may appoint the
second arbitrator. If the two arbitrators fail to agree on a third arbitrator
within thirty (30) days of their appointment, each of them shall name three
individuals, of whom the other shall decline two, and the choice shall be
made by drawing lots. All arbitrators shall be active or retired disinter-
ested officers of insurance or reinsurance companies or Underwriters at
Lloyd’s London, not under the control of either party to this Contract.
Each party shall submit its case to its arbitrator within thirty (30) days of
the appointment of the third arbitrator or within such period as may be
agreed by the arbitrators. All arbitrators shall interpret this Contract as an
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⎫
,
⎪
Petitioner, ⎪
- and - ⎬
⎪
,
Respondent
⎪
⎭
UMPIRE QUESTIONNAIRE
To help the parties evaluate the qualifications of umpire nominees in the
above-captioned arbitration, and to identify any potential conflict of
interest, please supply the following information:
1.Name:
Company:
Address:
Telephone:
Fax:
Cell Phone:
Email:
Home Address:
Telephone:
2. EMPLOYMENT HISTORY (please attach a current résumé or CV).
A. Current Employment (if not apparent from the attached résumé or CV)
Position Title:
Length of Employment:
Principal Duties:
B. PAST QUALIFYING EMPLOYMENT (if not currently an officer of an
insurance or reinsurance company [or an Underwriter at Lloyd’s of
London] and if not apparent from the attached résumé or CV).
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
3. Please provide a copy of your current fee schedule, including any
refundable or non-refundable retainer.
4. INSURANCE ARBITRATION EXPERIENCE
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40.47 New Appleman Insurance Practice Guide
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
C. Have you ever had any involvement in an insurance or reinsurance
transaction or dispute involving any of the parties, or involving such
parties’ subsidiaries, affiliates or parent companies?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
D. Have you ever had any involvement in an insurance or reinsurance
transaction or dispute involving any of the specific claims, policies and/or
treaties at issue in this matter as described in Question 8 below?
[ ] Yes [ ] No
_________________________________________________________________
_________________________________________________________________
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
E. To your knowledge, do any companies with which you are presently
affiliated or in which you presently have a financial interest have an
ongoing business relationship with any of the parties and/or affiliates
listed above?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
EXPERIENCE WITH OTHER PANEL MEMBERS AND PARTIES’
COUNSEL
A. Have you ever served on an arbitration panel with
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40.47 New Appleman Insurance Practice Guide
?
Name of Arbitrator
[ ] Yes [ ] No
If yes, for each such arbitration, state the approximate date of commence-
ment and termination (or whether still pending) and the respective
capacities in which you and acted, i.e., as
arbitrator or umpire.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
B. Have you ever served on an arbitration panel with
?
Name of Arbitrator
[ ] Yes [ ] No
If yes, for each such arbitration, state the approximate date of commence-
ment and termination (or whether still pending) and the respective
capacities in which you and acted, i.e., as
arbitrator or umpire.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
C. Have you ever served as an arbitrator, umpire, expert witness or
consultant in an arbitration or litigation at the request of any counsel
involved in this arbitration? [List counsel for all parties]
[ ] Yes [ ] No
If yes, identify counsel and disclose type of service and approximate date
so engaged.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
D. Have you ever served as an arbitrator, umpire, expert witness or
consultant in an arbitration or litigation in which any of the above-listed
counsel represented a party?
[ ] Yes [ ] No
If yes, identify counsel and disclose type of service and approximate date
so engaged.
_________________________________________________________________
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_________________________________________________________________
_________________________________________________________________
8. SUBJECT MATTER OF THE ARBITRATION
This arbitration involves [insert a neutral description of the dispute
between the parties]
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Might these facts or circumstances prevent you from rendering an
unbiased decision in this arbitration?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
9. OTHER CONSIDERATIONS
Are you aware of any facts or circumstances which (1) might impair your
ability to serve (including schedule availability) or (2) might create an
appearance of partiality on your part in the above-captioned arbitration?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Signature:
Date:
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