Elements of a Reinsurance Contract

This is for illustrative purposes only during web development. Adapted fully from The Law of Reinsurance by Colin Edelman QC, Andrew Burns.

1. Elements of a Reinsurance Contract

2.01 A reinsurance contract is formed according to normal contractual principles. There needs to be an offer and an acceptance of that offer to form an agreement, with consideration for the bargain and an intention by the parties to create legal relations between them. The relationship between reinsurer and reinsured may be one of utmost good faith when concluding the contract, but the essential requirements for the formation of a contract are the same.

(1) Offer

2.02 An offer to enter into a contract must disclose an apparent intention to be bound on an objective analysis.¹ An offer of reinsurance is generally in the form of a slip, wording or proposal proffered by the reinsured’s broker to a reinsurer or reinsurers in the market, but it is not confined to these conventional categories and, in theory, could be in any form setting out the terms of the offer. This would conventionally be carried around the market by the broker until the slip was fully subscribed by a number of reinsurers each accepting a proportion of the risk. Offer documents are now often sent around the marketplace by electronic means. An oral offer will in theory suffice, but is uncommon and uncommercial as it is important to be able to evidence the terms of the reinsurance when the offer is accepted. The broker may already have a good knowledge of the categories of business that are written by the prospective reinsurers or he might have already contacted them to discuss potential terms.² The reinsured or its agent either offers the opportunity to reinsure on express terms as set out in the offer, proposal or slip, or, unusually, could apply for reinsurance cover on the basis of the reinsurer’s standard terms.³ In normal circumstances an offer may be withdrawn at any time before it is accepted, by communication with the offeree. An unaccepted offer will lapse after a reasonable time.⁴

2.03 The circumstances of a reinsurance agreement may need to be analysed in some detail to avoid jumping to an erroneous conclusion as to even such a basic contractual notion as offer and acceptance. A slip stamped and signed by a reinsurer may not be the acceptance that it first appears, but an offer or even an invitation to treat. If a reinsured instructs a broker to see if reinsurance is available before the underlying insurance is agreed, the terms obtained from the lead reinsurer and signed lines subscribed on a slip may only amount to an offer or even an invitation to treat.

(2) Acceptance

2.04 Once all the relevant terms of the reinsurance are in place, a binding contract will arise when the reinsurer signifies its acceptance of the offer or counter-offer. The reinsurer should accept by a final and unqualified assent to the terms of the offer. This will usually be signified by a scratch, stamp and/or signature on the proposal, slip or policy.⁵An oral acceptance or acceptance by conduct will technically suffice, but may be difficult to prove, particularly if it falls within the course of negotiations between the parties over the terms⁶ and would be highly unusual in practice.

2.05 In cases where the broker has been instructed by the reinsured to see if reinsurance is available before the underlying insurance is placed and secures the reinsurers’ agreement to write the reinsurance, the reinsurance contract is only concluded when the reinsured actually places the order for the reinsurance, having decided to take the underlying risk.⁷

2.06 An acceptance can be made by the reinsurer itself or an agent with actual or ostensible authority.⁸ An acceptance which includes new or different terms for the reinsurance cover is actually a counter-offer, which itself needs to be accepted in order for a contract to be concluded. Silence cannot generally be an acceptance unless coupled with some conduct or course of dealing indicative of an intention to be bound, or unless an estoppel arises which prevents the offeree from resiling from the bargain.⁹

2.07 Once the reinsurance contract has been accepted and becomes binding, the reinsured’s general duty of utmost good faith¹⁰ comes to an end. A reinsured therefore does not have to disclose material facts that come to its knowledge after acceptance, but before the cover commences.¹¹ However, the duty continues in force up to the moment of acceptance.¹²

(3) Consideration

2.08 A reinsurance agreement must be supported by sufficient consideration.¹³ This is invariably supplied by the premium.¹⁴ A reinsurance premium is paid by the reinsured to the reinsurer and is calculated to reflect the element or proportion of the underlying risk that is passed to the reinsurer. Other sums payable in relation to the reinsurance contract may include ceding commission (payable to the reinsured as a reward for finding business for the reinsurer) and brokerage (paid to the broker under the separate agency contract between reinsured and broker).¹⁵ A binding reinsurance contract will exist before the premium is actually paid unless, unusually, payment is expressly made a condition precedent of the policy. If a premium warranty clause is a term of the reinsurance a failure to pay the premium will (in the absence of waiver) discharge the reinsurer from liability under the policy.¹⁶ The amount of the premium may be a rate to be agreed, and if no agreement is reached then the premium is taken to be a reasonable premium.¹⁷

(4) Complete and Certain Terms

2.09 The terms on which the parties are contracting must be complete and reasonably certain in order for a contract to exist.¹⁸ It is possible to find the terms of a reinsurance contract wholly within one document signed by all the parties.¹⁹ More common is a reinsurance contract contained within a slip followed by a formal policy with terms and conditions incorporated by reference to another document or documents, such as the standard market LMP or other London market form.²⁰ Where such standard terms and conditions are being incorporated it is usually necessary for them to be drawn to the attention of the reinsured²¹ unless the reinsured knows about them from a course of dealing or market notoriety. Proportional reinsurance may often be referred to as ‘back-to-back’ with the insurance: if the reinsured is liable under the underlying policy, the reinsurer will accept liability to pay whatever percentage of the claim it has agreed to reinsure. The reinsurance contract is found by taking the slip or reinsurance policy together with the underlying insurance policy.²² In a proportional reinsurance of this kind there is a presumption that, in the absence of clear words to the contrary, the scope and nature of the cover afforded is the same as the cover afforded by the insurance.²³

2.10 Words of incorporation should be interpreted so as to give effect to the context from which they had been drawn and into which they have been inserted.²⁴ This process involves an intelligent and not a mechanical approach to interpretation. The principles applicable to the incorporation of terms into a reinsurance contract by the words ‘as original’ or similar were set out by David Steel J in HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co:²⁵

I have been referred to a number of cases that have considered the effect of such general words in the fields of insurance and carriage of goods. I would summarise their effect as follows. Incorporation of a specific term (or condition) is only achieved if:

1. The term is germane to the reinsurance.
2. The term makes sense, subject to permissible ‘manipulation’, in the context of the reinsurance.

iii. The term is consistent with the express terms of the reinsurance.

1. The term is apposite for inclusion in the reinsurance.

2.11 An incomplete contract, which is missing vital terms such as the amount of the price or premium, is not a binding contract.²⁶ Similarly, if a necessary term or condition is uncertain and is not reasonably ascertainable from the documents or the surrounding circumstances,²⁷ then the contract will be void for uncertainty.²⁸

(5) Formality

2.12 There is no common law requirement that a reinsurance contract must be contained in a written policy document,²⁹ but this is compulsory in the marine insurance field.³⁰However, it is unusual to find reinsurance effected any other way except by a written reinsurance policy, treaty or slip as it is common market practice to assess the risk by reference to a slip or schedule and then scratch that document to demonstrate agreement to providing cover by a stamp and signature. In practice this means that it will be straightforward in most cases to show that the parties intended to enter into legal relations when the offer was accepted.³¹ It is possible to enter into reinsurance by an oral agreement which perhaps refers to a standard wording: such an agreement would be binding in theory, but difficult to rely upon in practice.