Duties of Reinsurers – New Appleman on Insurance Law Library Edition, Chapter 74

Duties of Reinsurers – New Appleman on Insurance Law Library Edition, Chapter 74

By Daniel W. Gerber, Jeffrey L. Kingsley, and Clayton D. Waterman

Chapter 74 provides a comprehensive analysis of the duties, obligations and limits of reinsurers in reinsurance transactions.

Section 74.01 begins by examining the duty of utmost good faith.   Section 74.01[1] discusses the cedent's duty of utmost good faith.  Section 74.01 [2] sets forth the reinsurer's duty of utmost good faith which has been recognized by courts in certain jurisdictions.  The section analyzes how courts utilize this lesser-known duty to limit a reinsurer's ability to challenge its indemnifications obligations. 

Section 74.01[3] outlines the reinsurer's remedy when the cedent breaches its utmost duty to disclose material information. Specifically, this section summarizes a reinsurer's remedies and burden in establishing a cedent's misrepresentation at the time of contract formation.  

Section 74.02 examines the "follow" principles under which the reinsurer is required to indemnify the cedent for the resolved claim which is seen as a natural outgrowth of the cedent's duty of utmost good faith.  This section explains and analyzes the scope and limitation of all of the "follow" principles including the follow the fortunes, follow the settlements, and follow the forms. 

Section 74.02[1] specifically addresses the follow-the-fortunes and follow-the-settlements doctrines by discussing the scope of the limitations of their respective use.  Section 74.02[1] also addresses the concepts and distinctions between the loss settlement and follow the form clauses, and the amendments to direct-side insurance cover. 

Section 74.02[2] lays the foundation as to why the reinsurance industry requires the reinsurer to follow the cedent's fortunes.  This section also explains why cedents are granted wide latitude, even to the point of making inconsistent representations, in the investigation, evaluation and resolution of claims. 

Sections 74.02[3] discusses whether courts regard the follow-the-fortunes doctrine to be an express or implied term within the reinsurance contract.  The section examines how courts in different jurisdictions come to a variety of conclusions as to whether the follow-the-fortunes is an implied term. 

Section 74.02[4] analyzes the instances in which a reinsurer will be liable beyond the scope of the reinsurance contract.  The section examines how some jurisdictions use the follow-the-fortunes principle in allocating defense costs and loss adjustment expenses to the reinsurer where the agreement is silent on the issue. 

Section 74.02[5] discusses the circumstances in which the reinsurer can absolve itself from the follow principles when the cedent did not act in good faith or was objectively unreasonable in the handling of the claim.

Section 74.03 details the scope and limitation of the reinsurer's indemnification obligation to the cedent.  This section examines the scope of the indemnification obligation to the cedent and instances in which the cedent may not be entitled to indemnification.  Finally, the section examines the reinsurer's indemnification obligation to non-signatory third-parties.  

Sections 74.03[2] discusses the obligations and limitations of a cedent seeking reimbursement for defense costs.  This section analyzes the reinsurer's obligations to defense costs when the agreement is ambiguous. 

Section 74.03[3] assesses situations where the reinsurer may be obligated to reimburse the cedent for declaratory judgment expenses.  The section focuses on how courts utilize extrinsic evidence to resolve disputes when the agreement is silent on the issue. 

Section 74.03[4], in turn, examines the reinsurer's responsibility to reimburse the cedent for any extra-contractual obligations and outlines incidents where the reinsurer, through certain conduct, would be required to cover such expenses. 

Section 74.03[5] details situations where the reinsurer is obligated to indemnify for additional losses exceeding the caps outlined in the agreement. The section details how reinsurers may be required to pay losses that exceed the contractual limits of the agreement. 

Section 74.04 discusses reinsurance presentation issues.  Section 74.04[1] explains the reinsurer's obligation when the cedent presents a single claim that consists of multiple losses known as aggregation.  This section outlines the language needed to maintain an enforceable aggregation clause in a reinsurance agreement. 

Section 74.04[2] discusses the circumstances in which the reinsurer is obligated to follow the cedent's allocation decisions.  This section explains how courts use the follow principles to give cedents latitude in the pre- and post-settlement allocation assessments. 

Section 74.04[3] provides guidance into how courts analyze, implement and restrict an offset clause in determining the net balance due and owing to the cedent.  This section outlines how courts calculate the net balance due after factoring the parties' mutual debts.

Section 74.05 examines the limited context in which a reinsurer is obligated to the original insureds directly.  Section 74.05[1] explains the basic principle that there is no direct right of action for an original insured against a reinsurer due to lack of privity. 

Section 74.05[2], in turn, provides the limited exceptions when the original insureds can assert a direct claim against a reinsurer.  The section outlines the approved methods by which a direct policyholder is able to establish a claim for reimbursement against the reinsurer. 

Section 74.05[3] discusses an original insured's ability to directly access Equitas, an entity created by Lloyd's of London in the mid-1990s to reinsure Lloyd's after the insurance industry suffered major setbacks due to large asbestos and environmental claims.  

Section 74.06[1] examines the reinsurer's obligations pursuant to an occurrence-based or claims-made agreement and outlines the distinctions between the two types of  agreements.  Section 74.06[2] details how commutation is used by the parties to resolve their obligations. Section 74.06[3], in turn, details the method and manner in which a reinsurance agreement can be effectively terminated through formal cancellation. 

Sections 74.06[4] details when the reinsurer's indemnification is formally triggered.  While Section 74.06[5] analyzes when a reinsurer's obligation to pay the claim is determined and outlines each of the different methods of payment.   

Section 74.07 examines the effect of insolvency on the reinsurance relationship including how a cedent's insolvency may alter a reinsurer's obligation especially if there are competing claims for reimbursement.  Section 74.07[2] examines the collection methods utilized by a cedent's liquidator in order reimburse the policyholders.

Section 74.08 examines a reinsurer's insolvency and how the reinsurer's assets are handled in a variety of circumstances. The section details how the individual state laws regulate the handling of the reinsurer's assets and how the run-off assets are to be used to satisfy (in whole or in part) the pending bills. 

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Daniel W. Gerber co-chairs Goldberg Segalla's Global Insurance Practice Group across the firm's eleven offices in New York, Pennsylvania, New Jersey, Connecticut and the United Kingdom. He was instrumental in the firm's Top 10 worldwide ranking on Reinsurance Magazine's Power List. He maintains an international practice in complex insurance coverage and reinsurance disputes. In addition, he advises insurance and reinsurance companies on the effective use of social media platforms and the mitigating risks associated with these strategies. Mr. Gerber has authored chapters on reinsurance, discovery in insurance litigation, risk shifting, life insurance and transactional insurance. He is the co-editor of The Insurance and Reinsurance Report blog (a LEXIS top 50 blog), and is the current chair of the Insurance and Reinsurance Committee of the International Association of Defense Counsel. He is also the co-editor of the Reinsurance Review, a monthly update on relevant reinsurance decisions and news. Mr. Gerber chairs the Defense Research Institute's (DRI) Counsel Task Force as well as its Social Media Task Force. He has served on DRI's Annual Meeting Steering Committee, and is immediate past chair of DRI's Insurance Roundtable. He is the current Chair of DRI's Life Health and Disability Committee. He currently serves on the Lexis Insurance Law Center Advisory Board. In addition, Mr. Gerber is the past Chair of the 3,500 member Torts, Insurance and Compensation Law Section of the New York State Bar, and currently serves in the New York State Bar Association House of Delegates. He is a US ARIAS certified arbitrator, possesses an AV rating from Martindale Hubbell, a Super Lawyer designation from Law & Politics Magazine, and has been named by his peers to Business First's Who's Who in Law. Mr. Gerber is admitted to the United States Supreme Court, as well as all federal and state courts in New York and Pennsylvania. He has received numerous awards and honors for his professional and community service. He may be found on Twitter at InsureReReport where he sends daily updates on insurance and reinsurance news and law to over 1500 followers.

Jeffrey L. Kingsley maintains an international practice with a focus on matters involving insurance and reinsurance coverage, commercial and regulatory issues and environmental litigation. He has extensive experience handling and advising clients on complex reinsurance litigation and arbitration issues. Mr. Kingsley provides comprehensive legal representation for Fortune 500 companies, insurers, reinsurers, and other businesses to help them manage risk at every stage of business and protect their interests when disputes arise. He works with clients during the developmental phase of business relationships to analyze agreements and potential strategies in order to reduce exposure and identify issues that may impede growth, including threats to a company's reputation. Mr. Kingsley is a frequent author and lecturer on topics in his areas of concentration. In 2011, he was the featured legal contributor in Reinsurance Magazine. He regularly participates in roundtable discussions with reinsurance industry leaders at the Reinsurance Rendez-Vous de Septembre in Monte Carlo. He has authored articles and publications on reinsurance, electronic discovery and insurance litigation.  He is also the co-editor of the Reinsurance Review, a monthly international publication that provides timely summaries of and access to the latest worldwide reinsurance law developments. In addition, he is the co-editor of The Insurance and Reinsurance Report Blog and the co-editor of the Twitter account InsureReReport, which provides an instant commentary on recent insurance and reinsurance industry trends.  He served as co-chair of ACI's 2012 Advanced Forum on Reinsurance Disputes in Arbitration and Litigation. He has received numerous awards including being selected for inclusion in Business First's Who's Who in Law. 

Clayton D. Waterman practices in the insurance and reinsurance field as a member of the Global Insurance Services group with Goldberg Segalla LLP. He has experience working on complex insurance coverage issues and has conducted extensive research in reinsurance. Mr. Waterman is a regular contributor to Goldberg Segalla LLP's The Insurance and Reinsurance Report blog, Reinsurance Review, and Professional Liability Monthly.

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