Reinsurance Law: An Analytic Approach

Table of Contents

Chapter 1

The Nature of Reinsurance

§ 1.01 Overview

§ 1.02 Reinsurance Defined

§ 1.03 Types of Reinsurance

[1] Facultative vs. Treaty

[a] Facultative Reinsurance

[b] Treaty Reinsurance

[c] Hybrids

[2] Proportional vs. Nonproportional

[a] Proportional Reinsurance

[i] Quota Share

[ii] Surplus Share

[iii] Contributing Excess

[b] Nonproportional Reinsurance

[i] Per Risk Excess of Loss

[ii] Per Occurrence Excess of Loss

[iii] Aggregate Excess of Loss

[3] Traditional Reinsurance vs. Finite Risk

[4] Retrocessional Reinsurance

[5] Assumption Reinsurance

§ 1.04 Parties to a Reinsurance Contract

CHAPTER 2

The Uses of Reinsurance

§ 2.01 Overview

§ 2.02 Effects of Reinsurance

[1] Risk Spreading

[2] Result Smoothing

[3] Increasing Capacity

[4] Balance Sheet Treatment

§ 2.03 Reinsurance in Different Lines of Business

[1] Property/Casualty

[a] Property

[b] Casualty

[2] Life/Heath

§ 2.04 The Convergence Between Reinsurance and Finance

[1] Financial Guaranty Insurance

[2] Film Financing

[3] Insurance-Linked Securities

[a] Catastrophe Bonds

[b] Life Insurance Securitization

[4] “Sidecars”

CHAPTER 3

Basic Reinsurance Regulation

§ 3.01 Overview

§ 3.02 The Insurance Regulatory System

[1] Evolution of the System

[a] Paul v. Virginia and the Development of State Regulation

[b] South-Eastern Underwriters and the Possibility of Federal Regulation

[c] The McCarran-Ferguson Act

[2] State Insurance Departments

[3] The NAIC

[4] Federal Inroads

[5] International Inroads

§ 3.03 The Purpose of Insurance/Reinsurance Regulation

[1] In General

[2] The Role of Reinsurance

§ 3.04 Reinsurance Regulatory Issues

[1] Credit for Reinsurance: Theory

[2] Credit for Reinsurance: Requirements

[a] The Reinsurer

[i] Licensing or Accreditation

[ii] Security

[b] The Reinsurance Contract

[i] The Insolvency Clause

[ii] Prompt Payment

[iii] Risk Transfer Requirements and Finite Risk Reinsurance

[iv] Retroactive Reinsurance

[v] The Nine Month Rule

[c] The Reinsurance Recoverables

[i] Overdue Balances

[ii] Disputed Balances

CHAPTER 4

Reinsurance Markets

§ 4.01 Overview

§ 4.02 Types of Reinsurers

[1] Professional Reinsurers vs. Reinsurance Departments

[2] Broker Markets vs. Direct Markets

§ 4.03 Geographic Markets

[1] The U.S. Market

[2] The London Market

[a] Lloyd’s

[i] The History and Structure of the Lloyd’s Market

[ii] Equitas

[iii] The Lloyd’s Chain of Security

[b] The London Company Market

[3] Bermuda

[4] Europe and Beyond

CHAPTER 5

Formation of Reinsurance Contracts

§ 5.01 Overview

§ 5.02 Disclosure Requirements

[1] The Duty of Utmost Good Faith

[2] Complying With the Duty of Utmost Good Faith

§ 5.03 The Role of Brokers in the Placement of Reinsurance Contracts

[1] In General

[2] Agency Issues Relating to Brokers

[3] Broker Liability

§ 5.04 Lead and Following Reinsurers

§ 5.05 Contract Documentation

[1] Slips

[2] Wordings

[3] Interests and Liabilities Contracts

[4] Facultative Certificates

CHAPTER 6

Reinsurance Contract Provisions

§ 6.01 Overview

§ 6.02 Provisions Common to Treaties and Facultative Certificates

[1] Basis of Reinsurance: The Reinsuring Clause

[2] Premium

[3] Limits

[4] Other Reinsurance

[a] Net Retained Lines Provisions

[b] Common Account Reinsurance Provisions

[c] Warranties of Retention

[5] Loss Provisions

[a] Ultimate Net Loss

[b] Loss Adjustment Expenses

[c] Declaratory Judgment Expenses

[d] “ECO” and “XPL” Provisions

[6] Follow-the-Settlements and Follow-the-Fortunes Provisions

[7] The Right to Associate

[8] Access to Records

[9] Errors and Omissions

[10] Security Requirements

[11] Insolvency Clauses

[12] Intermediary Clauses

§ 6.03 Treaty Provisions

[1] Identification of Cedent

[2] Business Covered

[3] Basis of Coverage

[a] Risks Attaching

[b] Losses Occurring During

[4] Exclusions

[5] Commencement and Termination

[6] Reinstatement Provisions

[7] “Deemer” Clauses

§ 6.04 Facultative Certificate Provisions

[1] The Certificate

[2] Declarations

[3] General Contract Terms

[a] Following Form Provisions

[b] Changes in the Underlying Policy

Chapter 7

Termination of Reinsurance Contracts

§ 7.01 Overview

§ 7.02 Contractual Termination Provisions

[1] Term vs. Continuous Contracts

[2] Basis of Termination

[a] Runoff

[b] Cutoff

[3] Special Termination Clauses

[4] Sunset Clauses and Commutation Clauses

§ 7.03 Commutations

[1] Commutations Defined

[2] Drafting Problems

[a] Identifying the Contracts Covered

[b] Identifying the Parties

[3] Cession of Commutation Payments

Chapter 8

Reinsurance Contract Administration

§ 8.01 Overview

§ 8.02 Reporting by the Cedent

[1] The Need for Reporting

[2] Types of Reporting

[a] Bordereau Reporting

[b] Summary Reporting

[c] Individual Loss Reporting

§ 8.03 The Role of the Broker

§ 8.04 Access to the Cedent’s Records

[1] Contract Provisions

[2] Underwriting Audits

[3] Claim Audits

[4] Limits on Access

§ 8.05 Implications of Access

[1] Does Disclosure to a Reinsurer Waive Privilege?

[2] Are Reinsurers Entitled to Privileged Information?

[a] The Effect of the Access to Records Clause

[b] The Common Interest Doctrine

[c] The “At Issue” Doctrine

CHAPTER 9

Reinsurance Claim Issues

§ 9.01 Overview

§ 9.02 The Follow-the-Fortunes/Follow-the-Settlements Doctrine

[1] The History and Nature of the Doctrine

[2] Application of the Doctrine

[a] Is an Express Follow-the-Fortunes Clause Required?

[b] What Constitutes a Follow-the Fortunes-Clause?

[c] Limits on the Application of Follow-the-Fortunes

[i] Bad Faith and Objective Unreasonableness

[ii] Fraud or Collusion

[iii] Claims Not Arguably Covered by the Underlying Policy

[iv] Claims Outside the Scope of the Reinsurance Contract

§ 9.03 Reinsurance Contract Issues

[1] Extracontractual Obligations and Excess of Policy Limits Judgments

[2] Declaratory Judgment Expenses

§ 9.04 Late Notice

[1] The Prejudice Requirement

[2] Notice as a Condition Precedent

[3] Bad Faith

Chapter 10

Allocation of Claims

§ 10.01 Overview

§ 10.02 The Allocation Problem

§ 10.03 Policy-Level Allocation Issues

[1] Trigger of Coverage

[a] The Concept

[b] Trigger Theories

[i] Exposure

[ii] Manifestation

[iii] Continuous Trigger

[iv] Injury-In-Fact

[2] Allocation to Triggered Policy Periods

[a] The Concept

[b] Allocation Methods

[i] Joint and Several

[ii] Time on the Risk

[iii] Pro Rata by Years and Limits

[iv] Pro Rata by Exposure

[3] Allocation to Primary and Excess Layers

[a] The Concept

[b] Allocation Methods

[i] Vertical Exhaustion

[ii] Horizontal Exhaustion

[iii] The Intermediate Approach

[4] Number of Occurrences

[a] The Concept

[b] Approaches

[i] Effect Test

[ii] Cause Test

[iii] Event Test

[c] Aggregation

§ 10.04 Reinsurance Allocation Issues

[1] In General

[2] The Impact of the Reinsurance Contract

[3] Application of Follow-the-Fortunes/Follow-the-Settlements

CHAPTER 11

Rescission of Reinsurance Contracts

§ 11.01 Overview

§ 11.02 The Duty of Utmost Good Faith

[1] Origins of the Duty of Utmost Good Faith

[2] The Continuing Relevance of the Duty of Utmost Good Faith

[3] Obligations Imposed by Utmost Good Faith

[4] Remedies for Violation of the Duty of Utmost Good Faith

§ 11.03 Rescission Based on Misrepresentation or Nondisclosure

[1] Misrepresentation or Nondisclosure

[a] Limitations on Misrepresentation Claims

[i] Estimates and Projections

[ii] Statements of Opinion

[b] Limitations on the Cedent’s Duty to Disclose

[i] Facts of Which the Reinsurer Should Be Aware

[ii] Must the Reinsurer Ask Questions?

[2] Materiality

[a] The Cedent’s Failure to Keep a Retention

[b] The Cedent’s Use of Managing General Agents

[c] Loss Projections

[d] Insolvency of the Cedent

[e] Terms of Underlying Policies

[3] Reliance

[4] Is Intent Required?

§ 11.04 Other Grounds for Rescission

§ 11.05 Defenses to Rescission

Chapter 12

Managing General Agents, Managing General
Underwriters, and Pools

§ 12.01 Overview

§ 12.02 MGAs and MGUs

[1] The Function of MGAs and MGUs

[2] Issues Relating to MGAs and MGUs

[a] Underwriting Problems

[b] Problems Raised by an MGA’s Failure or Termination

[c] Disputes Regarding the Scope of an MGA’s Authority

[d] Regulatory Responses

§ 12.03 Pools

[1] The Function of Pools

[2] Issues Relating to Pools

[a] Issues Common to MGAs and Pools

[b] Problems Posed by Fronting

CHAPTER 13

Reinsurance Arbitration

§ 13.01 Overview

§ 13.02 Arbitration Basics

[1] What Is Arbitration?

[2] Statutory Framework

[a] The Federal Arbitration Act

[b] The New York Convention

[c] State Arbitration Statutes

§ 13.03 Reinsurance Arbitration Clauses

[1] Scope of Arbitrability

[2] Composition and Appointment of Panel

[3] Arbitration Procedure

[4] Honorable Engagement

[5] Authorization to Confirm the Award

§ 13.04 Involvement of Courts Prior to Arbitration

[1] Motions to Stay Litigation and to Compel Arbitration

[a] Fraudulent Inducement Claims

[b] The Distinction Between Void and Voidable Contracts

[c] Other “Gateway” Issues

[2] Motions for Appointment of a Panel

[3] Pre-Hearing Challenges to an Arbitrator

[4] Consolidation

[a] Consolidation by Courts

[b] The Trend Toward Deference to Arbitrators

§ 13.05 Arbitration Procedure

[1] The Demand for Arbitration

[2] The Appointment of the Panel

[3] Position Statements

[4] The Organizational Meeting

[a] Panel Disclosures

[b] Hold Harmless Agreement

[c] Confidentiality Agreement

[d] Ex Parte Communications

[e] Scheduling

[5] Pre-Hearing Security

[6] Discovery

[a] Discovery Among Parties

[b] Third-Party Discovery

[7] The Hearing

[8] The Award

[9] The Functus Officio Doctrine

§ 13.06 Confirming, Vacating and Modifying an Award

[1] Confirmation

[2] Statutory Grounds for Vacating or Modifying an Award

[a] Corruption, Fraud or Undue Means

[b] Evident Partiality

[c] Misconduct

[d] Exceeding Powers

[3] The “Manifest Disregard” Doctrine

§ 13.07 Res Judicata/Collateral Estoppel Effect of Arbitral Awards

CHAPTER 14

Reinsurance Litigation

§ 14.01 Overview

§ 14.02 Issues Raised by Service of Suit Clauses

[1] The Service of Suit Clause

[2] Does a Service of Suit Clause Waive a Right to Remove?

[3] Does a Service of Suit Clause Waive a Right to Arbitrate?

§ 14.03 Preanswer Security

[1] Statutory Requirements

[2] Constitutional Considerations

[3] Who Is Covered by Security Requirements?

[a] Application of Security Requirements to Reinsurers

[b] Application of Security Requirements to State-Owned Reinsurers

[4] Who May Invoke Security Requirements?

[5] What “Pleadings” Trigger Security Requirements?

[6] Limitations on Security

[a] The Relevance of Other Available Security

[b] Limitation to Paid Losses

§ 14.04 Issues Relating to Lloyd’s and Equitas

[1] Diversity Jurisdiction and Lloyd’s Syndicates

[2] Actions Against Equitas

CHAPTER 15

Insurer and Reinsurer Insolvency

§ 15.01 Overview

§ 15.02 The State System of Insurer Insolvency Regulation

[1] The Unavailability of Federal Bankruptcy Relief

[2] State Insurer Insolvency Statutes

[3] Guaranty Funds

[4] Interstate Coordination

§ 15.03 Insolvency Proceedings

[1] Supervision

[2] Conservation

[3] Rehabilitation

[4] Liquidation

§ 15.04 Marshalling Assets

[1] In General

[2] The Significance of Reinsurance

[3] Reinsurance Issues

[a] The Importance of the Insolvency Clause

[b] Offset

[i] In General

[ii] Group-to-Group Offset

[iii] Case Reserves and IBNR

[iv] Statutory Limitations on Offset

[c] Removal and Arbitration

[i] The Issue

[ii] Abstention

[iii] McCarran-Ferguson

[d] Claim Estimation

[i] The Issue

[ii] Claim Estimation Absent Statutory Authorization

[iii] Statutory Provisions

§ 15.05 Paying Claims

[1] Procedure for Asserting a Claim

[2] Claim Disputes

[3] Claim Priority

[4] The Subordination of Reinsurance Claims

§ 15.06 Circumventing the Liquidation Process

[1] The Issue

[2] Contractual Cut-Through Provisions

[3] The Danger of Direct Payment Without a Cut-Through

[4] Direct Claims Without Cut-Throughs

§ 15.07 International Insolvency and Runoff Issues

[1] Schemes of Arrangement

[a] In General

[b] Solvent Schemes

[c] The Rhode Island Statute

[2] Part VII Transfers

[3] Enforcement of Foreign Proceedings in the United States

INDEX