By Barry Leigh Weissman, Partner, Edwards Wildman Palmer LLP, and Bella Shirin, Associate, SNR Denton US LLP
Chapter 76 discusses the role of utmost good faith in reinsurance transactions and dispute resolution.
Section 76.01 explains how the English doctrine of uberrimae fidei, first discussed in the 1766 case of Carter v. Boehm, morphed into the American concept of utmost good faith. The basics of utmost good faith is the concept that the reinsured, or cedent, knows more about the risk than the reinsurer. Thus, the cedent is obligated to reveal those risks, even if the reinsurer does not specifically request the information. As discussed in Section 76.01, the duty of utmost good faith as applied in the United States requires the cedent to "place the reinsurer in the same [situation] as himself [and] to give him the same means and opportunity of judging the value of risks." 
Section 76.02 discusses the fact that the failure to disclose facts that a reasonable cedent would believe were material to a reasonable reinsurer is a violation of the duty of utmost good faith. It is common for a cedent to provide a reinsurer with estimates of the volume of business and loss ratio anticipated. If these estimates are inaccurate, but the cedent believed them to be accurate at the time provided to the reinsurer, a court will likely not grant a reinsurer rescission. However, if the cedent knew or expected that the estimates were inaccurate at the time they were provided to the reinsurer, then a court is more inclined to grant the reinsurer rescission. Also, courts have granted a reinsurer rescission based upon a violation of the duty of utmost good faith when a cedent has omitted information that would have affected the reinsurer's analysis and determination whether to write the business.
Section 76.02 discusses the fact that a cedent will be held responsible in certain circumstances for the misrepresentation of its agents, e.g. a reinsurance intermediary. Section 76.02 examines whether the relationship between a cedent and reinsurer is a fiduciary relationship because of the duty of utmost good faith; courts are mixed and there really is not a definitive answer. Section 76.02 discusses what courts have considered to be material misrepresentations or omissions when considering whether a cedent has violated the duty of utmost good faith. Basically, when considering whether the misrepresentation or omission is material, courts look at if the true facts had been known to the underwriter whether the risk would have been underwritten. Courts have made it clear that when examining this issue, it is important to look at what was known at the time the risk was assumed, not what came to light at a later date.
Section 76.02 examines the reliance requirement. There is no breach of the duty of utmost good faith unless the reinsurer relied on the misrepresentation. Section 76.02 discusses whether it is necessary for the cedent to know and intend to make the material misrepresentation in order for there to be a violation of the duty of utmost good faith. Courts are divided on whether knowledge and intent is required in order to grant rescission. Section 76.02 discusses waiver. The reinsurance contract itself may waive the duty of utmost good faith. In order for a contractual waiver to be effective, the language must be clear and unequivocal. The reinsurer may also waive its right to rescission. Waiver occurs when the reinsurer is aware of the potential violation of the duty of utmost good faith, yet does nothing or actually ratifies the violation by its subsequent conduct.
Section 76.03 explains the how and when the duty of utmost good faith actually arises. Section 76.03 discusses specific examples of how courts have applied the doctrine to actual underwriting situations. This section mainly deals with how the duty applies to a cedent as it attempts to obtain reinsurance and the types of facts that must be disclosed to the reinsurer, whether requested or not. Sections 76.03, , and  discuss how the duty of utmost good faith arises in the claims context and its relationship to the follow the settlements doctrine. In essence, the cedent must keep the reinsurer advised of its potential exposure and once the cedent pays the claim, the reinsurer is obligated to pay the claim. Some exceptions to the follow the settlements doctrine occur when the cedent has not acted in utmost good faith, has made a payment that is not covered by the insurance policy or the reinsurance contract, or has not acted in a proper and businesslike manner in handling the claim.
Section 76.04 discusses what is necessary for a reinsurer to obtain rescission based upon a violation of the duty of utmost good faith. While there is no exact standard, as discussed in Section 76.02, courts have granted rescission when the cedent fails to disclose a fact that a reasonable cedent would believe was material to a reasonable reinsurer or intentionally withholds material information. Section 76.04 explains that while there may have been a violation of the duty of utmost good faith, the court can grant the equitable remedy of reformation rather than rescission. Reformation is basically the re-writing of the contract to conform to the parties' intentions and actions after entering into the contract. Sections 76.04,  and  discuss the remedies that are available to a reinsurer for a breach of the duty of utmost good faith. Generally, courts do not award damages, although that has occurred as well as awarding such things as more favorable renewal rates or terms.
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 US/NY-Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1069 (2d Cir. 1993), quoting Christiania Gen. Ins. Corp. of N.Y. v. Great American Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992).
Barry Leigh Weissman is a partner in the firm of Edwards Wildman Palmer LLP and is a member of the Insurance and Reinsurance Department. He focuses his practice on reinsurance including both dispute resolution and contract drafting. In addition, he lectures frequently to various organizations on issues of interest to the reinsurance industry.
Bella Shirin is an associate in SNR Denton US LLP's Insurance Regulatory Practice. She has worked with many clients in helping to develop risk management solutions. Ms. Shirin has assisted reinsurance companies with resolution of disputes.
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