CONTRACT CERTAINTY AND MINIMISING RISK IN
INSURANCE AND REINSURANCE ARRANGEMENTS FOR LARGE / COMPLEX PROJECTS
Many Authors: jurisdictions in the MENA region
Sam Wakerley, require direct insurance to be placed
Partner, Holman with a locally licensed insurance
Fenwick Willan Luke Hacker, Senior company. For complex and high value
Associate, Holman risks it is not uncommon for the local cedant Fenwick Willan to retain little( and in some cases none) of the
risk. This arrangement gives rise to a number of important issues for all parties involved, which we explore further in this article. resolution clauses. Despite this, dispute resolution clauses are often not the subject of much, if any, considered negotiation.
Parties must therefore consider how they will negotiate the contracts so as to ensure coverage is“ seamless” and the terms are back to back and consider whether this will be left to the broker or whether underwriters and / or lawyers will be involved.
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Are the contracts back to back? When considering the relationship between the parties, it is important to appreciate the fundamental principle that the reinsurance and insurance contracts are separate agreements.
If there is a loss, the insured will claim under its insurance policy issued by the cedant, whose liability is determined under the terms of the insurance policy. The cedant needs to know that its reinsurance programme will respond.
This issue has to be considered when the risk is placed. However, achieving a seamless backto-back relationship between the contracts is not always as simple as writing“ as original” in the reinsurance as there is a real possibility that a specific term in the reinsurance contract will override the original insurance policy.
Of particular importance in this regard is the choice of governing law, which can affect whether the contracts will be interpreted as being back-to-back. Where the insurance and reinsurance contracts have different governing law provisions, or where either is silent, this can create a problematic mismatch. Furthermore, this issue may only come to light when a claim is made and when the cedant finds itself settling an inwards liability, whilst being unsure whether its outwards reinsurance will respond. Issues can also arise as to, for example, differing dispute
Are the contracts all in place? Another issue that can arise at placement, is a result of the order in which the direct insurance and the reinsurance are placed. Sometimes the reinsurance“ security” will be identified first, and presented to the insured before the cedant is identified, or the insurance policy drawn up. Sometimes the cedant is identified first and the reinsurance programme organised afterwards.
There are pros and cons in favour of either arrangement. But what must be avoided at all costs is the situation in which, due to oversight, no direct insurance is placed at all, leaving the“ insured” without any protection at all.
Who is in control of the settlement? Parties will also want to consider the extent to which the reinsurance contract provides that the reinsurer should“ control” the settlement of the inwards claim under a“ claims control clause”, whether the cedant should be obliged to“ co-operate” with the reinsurer before settling a claim, and to what extent the reinsurer should be bound to“ follow the settlements” of the cedant.
It is important to be alive to the issue of“ control” when placing the risk because when there is a claim there may be a tension between the priorities of the local cedant and the reinsurers.