Reinsurance and the Law of Aggregation

Event, Occurrence, Cause

Oliver D. William

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000329100
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto commerciale

In excess of loss reinsurance, the reinsurer covers the amount of a loss exceeding the policy's deductible but not piercing its cover limit. Accordingly, a policy's quantitative scope of cover is significantly affected by the parties' agreement of a deductible and a cover limit. Yet, the examination of whether a loss has exceeded deductible or cover limit necessitates an educated understanding of what constitutes one loss. In so-called aggregation clauses, the parties to (re-)insurance contracts regularly provide that multiple individual losses are to be added together for presenting one loss to the reinsurer when they arise from the same event, occurrence, catastrophe, cause or accident. Aggregation mechanisms are one of the core instruments for structuring reinsurance contracts.

This book systematically examines each element of an aggregation mechanism, tracing the inconsistent usage of aggregation language in the markets and scrutinizing the tests developed by courts and arbitral tribunals. In doing so, it seeks to support insurers, reinsurers, brokers and lawyers in drafting aggregation clauses and in settling claims.

Focusing on an analysis of primary sources, particularly judicial decisions, the book interprets each judicial decision to describe a system of inter-related rules, collating, organising and describing the English law of aggregation as applied by the courts and arbitral tribunals. It further draws a comparison between the English position and the corresponding rules in the Principles of Reinsurance Contract Law (PRICL).

PART I

AGGREGATION OF RELATED CLAIMS

CHAPTER 1

Relevance of aggregation in various reinsurance products

DOI: 10.4324/9781003080480-1

1.1 The aim of chapter 1 is to offer an overview of the reinsurance products in which the aggregation of losses based on causation may be an issue. It appears sensible to first concisely outline the idea of reinsurance. The basic distinctions of different types and forms of reinsurance shall then be discussed. Finally, the findings of the chapter will be presented in a summary.

1.2 Hereafter, the distinction between different ‘forms’ of reinsurance will be used to differentiate between facultative and treaty reinsurance.¹ Further, reinsurance contracts are divided into the ‘types and methods’ of proportional and non-proportional contracts.² However, the terminology of ‘forms’ and ‘types and methods’ of reinsurance is not used consistently in legal literature.³

1 Andreas Schwepcke, Rückversicherung, Produktorientierte Qualifikationen (2nd edn, VVW 2004) 111; Sieglinde Cannawurf and Andreas Schwepcke, ‘§ 8 Das Vertragsrecht der Rückversicherung’ in Dieter W Lüer and Andreas Schwepcke (eds), Rückversicherungsrecht (C.H. Beck 2013) paras 264 ff; Andreas Schwepcke and Alexandra Vetter, Praxishandbuch: Rückversicherung (VVW 2017) paras 632 ff; Peter Liebwein, Klassische und moderne Formen der Rückversicherung (3rd edn, VVW 2018) paras 59 ff.

2 Colin Edelman and Andrew Burns, The Law of Reinsurance (2nd edn, OUP 2013) paras 1.33 ff; Cannawurf and Schwepcke (n 1) paras 270 ff. See also Schwepcke (n 1) para 111; Schwepcke and Vetter (n 1) paras 655 ff.

3 Barlow Lyde & Gilbert LLP, Reinsurance Practice and the Law (Informa Law from Routledge 2009) paras 4.1 ff, distinguish between the different types of facultative and treaty reinsurance and use the term ‘form’ for a multitude of different distinctions within the broad types of reinsurance; Özlem Gürses, Reinsuring Clauses (Informa Law from Routledge 2010) paras 1.04 ff, refers to different ‘forms’ of reinsurance when distinguishing between all four different categories, ie facultative, treaty, proportional, non-proportional reinsurance. See also Cannawurf and Schwepcke (n 1) n 456; Stefan Pohl and Joseph Iranya, The ABC of Reinsurance (VVW 2018) 8, differentiate between the different types of facultative and treaty reinsurance.

1.3 Both distinctions are essential for the analysis of the subject matter of the aggregation of losses. The workings of the different forms and types of reinsurance contracts allow for a better understanding of the circumstances under which the aggregation of losses may become relevant.

I Basic idea of reinsurance

1.4 Just as individuals and businesses have an interest in protecting themselves against certain risks, insurance companies have a need to protect themselves against risks they accept under primary insurance contracts.⁴ Similarly, a reinsurer may need to take out insurance for the risk it accepts under the reinsurance contract. A contract reinsuring a reinsurer is termed a retrocession agreement.⁵

4 Barlow Lyde & Gilbert LLP (n 3) para 1.4; Gürses (n 3) para 1.01.

5 Barlow Lyde & Gilbert LLP (n 3) para 1.5; Edelman and Burns (n 2) para 1.18; Cannawurf and Schwepcke (n 1) para 202.

1.5 By taking out reinsurance, a reinsured⁶ or retrocedent passes a share of the underlying risk onto a reinsurer or retrocessionaire.⁷ The reinsured party thereby safeguards its solvency and at the same time increases the volume or size of risk it can accept.⁸

6 Also referred to as ‘reassured’, ‘cedent’, ‘ceding company’, ‘direct insurer’, ‘original insurer’ or ‘primary insurer’.

7 Edelman and Burns (n 2) para 1.09. Hereinafter, unless specifically indicated otherwise, any references to a reinsured or a reinsurer includes retrocedents or retrocessionaires, respectively.

8 Gürses (n 3) para 1.01; Edelman and Burns (n 2) paras 1.10 f.

1.6 According to Kiln, ‘reinsurance’ is simply the insurance of an insurance company.⁹ In most national jurisdictions, there is no statutory definition of what constitutes a reinsurance contract.¹⁰ On a European level, however, ‘reinsurance’ is defined in point 7(a) of Article 13 of Directive 2009/138/EC as ‘the activity consisting in accepting risks ceded by an insurance undertaking (…), or by another reinsurance undertaking (…)’.¹¹ In Article 1.2.1 paragraph (1) PRICL,¹² a contract of reinsurance is defined as ‘a contract under which one party, the reinsurer, in consideration of a premium, promises another party, the reinsured, cover against the risk of exposure to insurance or reinsurance claims’.¹³ As early as in 1807, Lord Mansfield provided a similar definition for contracts of reinsurance under English law. In Delver v Barnes, he suggested that reinsurance ‘consist of a new assurance, effected by a new policy, on the same risk which was before insured in order to indemnify the underwriters from their previous subscription (…)’.¹⁴

9 Robert Kiln, Reinsurance in Practice (4th edn, Witherby 1991) 1. See also Barlow Lyde & Gilbert LLP (n 3) para 1.4; Gürses (n 3) para 1.01.

10 Barlow Lyde & Gilbert LLP (n 3) para 1.6, highlighting an exemption in section 620 of the Californian Civil Code which defines a reinsurance contract as a contract ‘by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance’.

11 Parliament and Council Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) [2009] OJ L 335.

12 For more details as to the PRICL 2019, see paras 4.123 ff.

13 Article 1.2.1 PRICL.

14 Delver, Assignee of Bunn v Barnes [1807] 1 Taunton 48, 51.

1.7 These definitions suggest that a primary insurance contract must be in place before a reinsurance contract can be taken out.¹⁵ In practice, however, reinsurance contracts are often concluded with the prospect that a primary insurance contract to be reinsured will be concluded later in the process.¹⁶ This may be the case if a risk is of the quality that a primary insurer will only accept it after having ensured that reinsurance cover for this risk is in place.¹⁷ This is, however, not to say that a reinsurance contract would be effective if subsequently no primary insurance contract were concluded.¹⁸

15 Cf Barlow Lyde & Gilbert LLP (n 3) para 1.7; Edelman and Burns (n 2) para 1.22.

16 See, for instance, Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852 (HL) 893 (Lord Griffith).

17 Edelman and Burns (n 2) para 1.22.

18 Cannawurf and Schwepcke (n 1) paras 4 f.

1.8 On a more functional level, a ‘reinsurance contract’ is a contract whereby a primary insurer takes out insurance with a reinsurer against the costs it may incur if it has to indemnify its primary insured for claims under a primary insurance policy issued by it.¹⁹ Under such a contract, the reinsurer agrees to indemnify ‘the original insurer against the whole or against a specified amount or proportion (…) of the risk which the latter has himself insured’.²⁰ In return, the reinsured promises the payment of a premium.²¹

19 Cf Barlow Lyde & Gilbert LLP (n 3) para 1.4; Cannawurf and Schwepcke (n 1) para 3; Pohl and Iranya (n 3) 7.

20 Forsikringsaktieselskapet Vesta v Butcher (n 16) 852, 908 (Lord Lowry).

21 Edelman and Burns (n 2) para 1.29.

1.9 The reinsured’s insurable interest is to be identified by reference to the original insurance policy.²² Consequently, unless there is a primary insurance contract to be reinsured, there cannot be said to be a contract of reinsurance. In German legal literature, the term ‘accessoriness’ (Akzessorietät) is used to describe the dependence of a reinsurance contract on the primary insurance contract.²³ Similarly, English legal commentary suggests that ‘[t]he indemnity afforded by reinsurance is (…) against the discharge of liability by the reinsured’ so that the reinsured could not make a profit out of the reinsurance.²⁴

22 Eagle Star Insurance Co Ltd v Toomey [1994] 3 Lloyd’s Rep IR 1 (CA) 7 (Hobhouse LJ); Edelman and Burns (n 2) para 1.29.

23 Cannawurf and Schwepcke (n 1) para 4.

24 Edelman and Burns (n 2) para 1.29.

II Different forms of reins...