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Insurance Law

Introduction and General Principles of Reinsurance Law – New Appleman on Insurance Law Library Edition, Chapter 71

Daniel Gerber and Jeffrey Kingsley   By Daniel W. Gerber, Jeffrey L. Kingsley and Fallyn B. Reichert, Attorneys, Goldberg Segalla LLP

Chapter 71 provides a thorough introduction to reinsurance and its commercial purposes; the operation of reinsurance contracts; and certain fundamental legal concepts.

Section 71.01 begins by discussing the history of reinsurance and the evolution of the reinsurance agreement. This section highlights the changing relationship of the parties to the transaction and the corresponding duties and obligations.

Section 71.02[1] sets forth a basic definition and characteristics of a reinsurance transaction. Section 71.02[2] describes the parties to a reinsurance contract. This section discusses the role of the insurer purchasing reinsurance, known as the cedent, and the insurer providing the reinsurance, the reinsurer. This section also defines the term retrocession as the reinsurance of reinsurance and details the transfer of risk from one reinsurer, the retrocedent, to a new reinsurer, the retrocessionaire. Lastly this section discusses the role of reinsurance intermediaries in the common reinsurance transaction.

Section 71.02[3] details the main purposes for which reinsurance is used. This includes the purpose of limiting liability on a risk, discussed in Section 71.02[3][a], obtaining a measure of stability or predictability of losses, discussed in Section 71.02[3][b], protection against insolvency arising from catastrophic loss, discussed in Section 71.02[3][c], and reducing the reserve requirements thereby increasing the insurer's surplus as discussed in Section 71.02[3][d].

Section 71.02[4] discusses the common structures of the assumption of risk through reinsurance. The two basic structures in reinsurance contracts are proportional risk sharing, detailed in Section 71.02[4][a], and non-proportional risk sharing, detailed in Section 71.02[4][b]. Proportional contracts share risk. These sections combined illustrate that the way to distinguish between these two types is focusing on how the risk is allocated between the ceding insurer and the reinsurer. If the contract sets forth the sharing of risk on a prorated prearranged percentage basis this is a proportional contract. If instead the reinsurer has agreed to accept all or a percentage of the loss above a stated amount, this represents a non-proportional basis.

Section 71.02[5] provides an overview of what reinsurance is not. Reinsurance is oftentimes confused with co-insurance (see Section 71.02[5][a]), multiple insurance, (see Section 71.02[5][b]), and excess insurance, (see Section 71.02[5][c]). Each of these categories is explained as distinct from reinsurance.

Section 71.02[6] discusses the principle in insurance that an insured must have an insurable interest in the thing insured. Section 71.02[6][a] defines the concept of the insurable interest and Section 71.02[6][b] explains its applicability in the reinsurance context and its limitations on the scope of a reinsurance contract. Section 71.02[6][c] then provides an insurable interest example where the scope of the reinsurance contract may appear to exceed the scope of the primary policy. The example centers on the area of extra-contractual obligations and losses that are in excess of policy limits.

Section 71.03 is comprised of an analysis of the most common types of reinsurance coverage. The two basic forms of reinsurance coverage, treaty and facultative, are detailed. Section 71.03[1][a] provides an introduction to treaty coverage agreements or contracts for reinsurance. A reinsurance treaty is the most common type of reinsurance arrangement and usually creates a long-lasting relationship between the cedent and the reinsurer. A treaty commits a reinsurer to accept all of a cedent's business that is covered under the treaty.

Treaty coverage can be structured either proportionally or non-proportionally. Section 71.03[1][b] discusses common forms of proportional treaty reinsurance including quota share reinsurance and surplus reinsurance. Section 71.03[1][b][i] explains that a quota share treaty provides reinsurance for all of the covered policies on a fixed percentage basis. Section 71.03[1][b][ii] explains that a surplus treaty provides reinsurance on a varying percentage of the covered policies in excess of an amount retained by the ceding insurer.

Section 71.03[1][c] details the most common forms of non-proportional treaty reinsurance. Section 71.03[1][c][i] provides an overview of working excess of loss treaty reinsurance. This section demonstrates the ease of administration and benefits of purchasing a working excess of loss treaty to provide coverage for amounts in excess of a cedent's stated retention.

Section 71.03[1][c][ii] details the catastrophe excess of loss treaty. This section distinguishes the catastrophe excess of loss treaty from the excess of loss treaty based upon the triggering event for reinsurance coverage - a catastrophic event or occurrence.       Section 71.03[1][c][iii] discusses stop loss and aggregate excess of loss treaties. The section explains that these treaties protect the cedent from an accumulation of losses not arising from a single occurrence.

Section 71.03[1][c][iv] explains time and distance treaties, or what is also known as financial or finite reinsurance. The section discusses the characteristics of these treaties such as the smaller risk transfer and the focus on the time value of money and interest rates.

Section 71.03[1][c][v] provides an example of a hybrid form of a non-proportional treaty, known as a contributing excess treaty. This section explains how the treaty can be structured such that the cedent maintains a retention level, but also has a share in the amount of the loss above that retention level.

Section 71.03[2][a] provides a general definition of the other basic form of reinsurance, which is reinsurance coverage  provided on a facultative basis. Facultative reinsurance can be written on either a proportional or non-proportional basis but differs from treaty reinsurance in that the reinsurer has discretion in accepting or rejecting each individual risk presented to it by the ceding insurer.

Section 71.03[2][b] discusses the use of a facultative certificate in reinsurance transactions made on this basis. Section 71.03[2][b][i] further explains the use of a declarations page in a facultative certificate to set forth the most important features of the reinsurance contract, i.e. identifying the parties, the underlying policy, any retention, the method of risk-sharing and the agreed upon premium. Also addressed is a page of general pre-printed terms and conditions, i.e. boilerplate terms, which apply to the agreement. This use of terms is discussed in Section 71.03[2][b][ii].

Section 71.03[2][c] details a hybrid form of reinsurance which essentially functions like a treaty while allowing the reinsurer a short period of time to reject any certain risk or the entire faculty.

Section 71.04 addresses key concepts in reinsurance. Section 71.04[1] discusses the construction and interpretation of the reinsurance contract and the importance of terms that may be implied into the agreement. The section addresses courts' use of trade usage and custom in the industry when deciding whether certain terms should be implied in the contract.

In Section 71.04[2] the effect of the custom and practice of the reinsurance industry on interpretation of contracts is discussed including terms that are implied into contracts by virtue of the fact that the parties would reasonably expect the contract to contain such term.

Section 71.04[3] addresses the duty of utmost good faith as a key concept. This section provides the history of the concept, tracing it back to the beginning of reinsurance where the agreements were thought of as an honorable engagement  often secured by a handshake. This section explains that this duty creates the standard by  which the parties' actions under the contract often are judged.

Section 71.04[4] explains the key concept of follow the fortunes contained in reinsurance contracts. This essential doctrine gives the ceding insurer wide latitude in claims adjustment processes and provides for efficient reimbursement of covered losses by the reinsurer. This section also discusses the follow the settlements doctrine, which operates in a similar manner to the follow the fortunes doctrine in the context of the ceding insurer's adjustment and settlement of claims.

Section 71.04[5] explains the key concept of following form commonly present in reinsurance contracts. This section discusses the concept and explains how it provides that the reinsurance contract be concurrent with the underlying insured policy with respect to the terms, conditions, and scope of coverage.

Section 71.04[6] addresses the applicability of the notice-prejudice rule in the reinsurance context. The section examines how the courts are not uniform in the application of the rule to reinsurance agreements; however, the majority of courts requires a showing of prejudice by the reinsurer before it can raise the defense of late notice.

Section 71.05 discusses the advantages to placing reinsurance with an admitted reinsurer. This discussion includes the benefit to the insured through the allowance of financial statement credit when a reinsurer meets the criteria for licensing set by the appropriate governmental authorities.

Section 71.06 provides a working definition of the key term bordereau or bordereaux as used in the reinsurance context. The section explains that a bordereau functions as a report providing either premium and policy information (premium bordereau) or claims and claims expenses (loss bordereau).

Section 71.07 provides a definition of the term placement slip as used in the reinsurance language. The section sets forth that a placement slip is an extremely brief contract which serves as a summary of the parties' agreement. Despite its brevity, the placement slip can be a legally binding document.

Section 71.08 provides an overview of cut-through endorsements contained within a reinsurance agreement. This section demonstrates that cut-through endorsements provide an exception to the privity of contract rules and can allow a third-party insured to recover directly from the reinsurer. This situation is most commonly seen in the case of the ceding insurer's insolvency.

Section 71.09 explains fronting arrangements as used in the reinsurance context. As explained in this section, fronting arrangements are commonly used when the reinsurer is not licensed or admitted, but associates with a licensed or admitted carrier to allow the ceding insurer to take full advantage of the benefits allowed for admitted reinsurance or to allow the reinsurer to write business that it is not otherwise authorized to write. This section also contains an introduction on the use and role of captive insurance companies.

Section 71.10 discusses financial reinsurance products commonly called finite reinsurance. The section sets forth the focus of finite reinsurance as being on financial risks such as timing, investment, and credit. As explained in this section, these transactions tend to involve significantly less of a risk transfer and are highly structured to meet a specific need.

Section 71.11 provides an introduction to reinsurance sidecars. The section explains that reinsurance sidecars are mostly used in the property catastrophe market where they act as dedicated pools of capital, fully collateralized, and can quickly and cost effectively provide capacity to the market.

 Section 71.12[1][a] details the regulation of reinsurance at the state level, including state regulation of reinsurer solvency and the availability of financial statement credit for purchasing reinsurance. Section 71.12[1][b] discusses the trend towards regulation of reinsurance at the federal level and the push for conformity of reinsurance regulations and standards on a national and even international level.

Section 71.12[2] discusses the role of reinsurance intermediaries in the procurement and placement of reinsurance. Although reinsurance can be placed directly, most reinsurance is placed through the use of an intermediary. This simplifies the process by having the intermediary be responsible for communications between the parties, drafting proposed agreements, and handling the ministerial tasks. Reinsurance intermediaries have been held to be dual agents of both the reinsurer and cedent.

Finally, Section 71.12[3] provides an overview of federal reinsurance programs. Section 71.12[3][a] provides an overview of the federal government's involvement in flood reinsurance. The section explains that the National Flood Insurance Program is administered by Federal Emergency Management Agency. This section highlights that the flood program has been criticized for its outstanding federal debt and the push for involvement of the private reinsurance market to aid in minimizing the federal debt load resulting from this program.

Section 71.12[3][b] provides an overview of the federal government's Terrorism Risk Insurance program. This section explains that the program was implemented after the events of September 11, 2001 and has been extended multiple times. The section provides an overview of the goal of the federal government program - ensuring that terrorism risk insurance is widely available to consumers and at an affordable price.

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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 is Chair of Goldberg Segalla's Reinsurance Practice within the firm's Global Insurance Services Practice Group and 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 consulting 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.

Fallyn B. Reichert is a member of Goldberg Segalla's Global Insurance Services Group. She focuses her practice on reinsurance, complex insurance coverage analysis, and insurance defense litigation. Ms. Reichert is a regular contributor to The Insurance and Reinsurance Report Blog, Reinsurance Review, and CaseWatch Insurance.

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