Getting the Deal Through – Insurance ... - Buddle Findlay

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Insurance & Reinsurance
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2012
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Insurance and
Reinsurance 2012
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Global Overview Andy Tromans and Nigel Brook Clyde & Co LLP 3
Argentina Carlos A Estebenet and Francisco Roggero
Bulló Tassi Estebenet Lipera Torassa Abogados 7
Australia Tim Griffiths, Jonathan Tapp and Mark Kimberley HWL Ebsworth Lawyers 13
Bahamas Linda Beidler-D’Aguilar Graham Thompson & Co 22
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Brazil Luis Augusto Roux Azevedo De Luca, Derenusson, Schuttoff e Azevedo Advogados 36
Bulgaria Irina M Stoeva and Pavel N Vitliemov Stoeva, Kuyumdjieva & Vitliemov 42
Canada John L Walker, Sean G Sorensen and Margaret S Pak Walker Sorensen LLP 47
Chile Ricardo Rozas and Max Morgan Jorquiera & Rozas Abogados 54
China Carrie Yang Clyde & Co LLP 60
Costa Rica Neftalí Garro and Said Breedy BLP Abogados 67
France Pascal Ormen and Romain Dupeyré Bouckaert Ormen Passemard Sportes – BOPS law firm 72
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India Sakate Khaitan Clasis Law 102
Israel Rachel Levitan and Yael Navon Levitan Sharon & Co Advocates & Notaries 108
Italy Alessandro P Giorgetti Studio Legale Giorgetti 114
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Luxembourg Chantal Keereman and Armel Waisse Bonn & Schmitt 126
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New Zealand Scott Barker, Peter Niven, Sebastian Bisley Buddle Findlay 138
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United Kingdom Andy Tromans, Nigel Brook and Barbara Riggs Clyde & Co LLP 177
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Buddle Findlay
new zealand
New Zealand
Scott Barker, Peter Niven, Sebastian Bisley
Buddle Findlay
Regulation
1 Regulatory agencies
Identify the regulatory agencies responsible for regulating insurance
and reinsurance companies.
New Zealand is in the process of implementing a greater degree of
regulation of insurance companies, though the regulation still reflects
a light-handed regulatory approach. Insurance provision is governed
by the common law and a range of statutes that provide a degree of
regulation in different areas.
The Reserve Bank of New Zealand has responsibility for
prudential supervision of insurers carrying on business in New
Zealand (as defined in the Insurance (Prudential Supervision) Act
2010). This includes responsibility for the licensing of insurers, which
had to be effected by 7 March 2012. The Reserve Bank also has
powers in respect of insurers in financial distress or other difficulties.
The Ministry of Economic Development administers the
Financial Advisers Act 2008, which also applies to insurers.
2 Formation and licensing
What are the requirements for formation and licensing of new
insurance and reinsurance companies?
At common law, all people who are competent to enter into contracts
may be parties to any contract of insurance. Insurance may be
provided, therefore, by a range of legal persons. The New Zealand
insurance market is characterised by a small number of large insurers
with a large market share and some fairly small providers. There are
over a hundred commercial insurers, including some finance company
groups which have insurance subsidiaries and some insurers which
are in run-off, mutual providers of insurance and friendly societies.
Any legal person complying with the relevant statutory requirements
can engage in the business of insurance provision. The formation of
an insurance company is governed by the general law for company
formation (the Companies Act 1993).
A licensing requirement for insurers carrying on business in New
Zealand has been introduced by the Insurance (Prudential Supervision)
Act 2010. Any insurer that is carrying out insurance business in
New Zealand (as defined in the Act) had to be provisionally licensed
by 7 March 2012, and must be fully licensed by September 2013.
The Act imposes prudential standards and fit and proper standards
for directors and some key officers (chief executive, chief financial
officer and actuary) that must be met in order to obtain a licence.
In order to obtain a licence, an insurance company must have
a policy meeting the requirements of the Act to ensure that only fit
and proper persons are appointed to and continue to hold office as
directors or act as key officers of the insurer, a certificate stating that
all the directors and key officers of the insurer are fit and proper
persons and a risk management programme that complies with the
requirements of the Act. The insurer must also meet the relevant
prudential requirements, such as the required financial strength
rating, solvency standards, demonstrate the ability to comply with
the various requirements of the Act and regulations made under the
Act, and must demonstrate that it has the ability to carry on business
in a prudent manner. The Reserve Bank has now issued the solvency
standards for various types of insurance business, including those
in run-off.
The Financial Advisers Act 2008 requires insurers or their
employees or both to be licensed as financial advisers under the Act.
The exact licensing requirements depend on the type of insurance
business carried out by the insurer. The Financial Service Providers
(Registration and Dispute Resolution) Act 2008 also requires insurers
that provide services to ‘retail clients’ (as defined in the Act) to belong
to an approved dispute resolution scheme.
3 Other licences, authorisations and qualifications
What licences, authorisations or qualifications are required for
insurance and reinsurance companies to conduct business?
From 7 March 2012 all insurers carrying on insurance business in
New Zealand (as defined in the Insurance (Prudential Supervision)
Act 2010) must have a provisional licence and must be fully licensed
by September 2013. There are some entities that are automatically
excluded from the act, including trade associations providing
ancillary insurance benefits to their own members, bailees and
innkeepers. Other entities can apply to be exempted from some
of the Act’s requirements (but not the requirement to be licensed),
including overseas insurers supervised by a recognised overseas
regulator, Lloyd’s and a small friendly society or small insurer already
carrying on business by 7 September 2010 with an annual gross
written premium of less than NZ$1,500,000.
A provisional licensing system for existing insurers carrying on
insurance business in New Zealand prior to 7 September 2010 is
in place under the Act until 7 September 2013 for those existing
insurers who apply for a provisional licence. From 7 September 2013
all insurers are required to have a full licence.
Insurers or their employees or both require licensing as financial
advisers under the Financial Advisers Act 2008.
4 Officers and directors
What are the minimum qualification requirements for officers and
directors of insurance and reinsurance companies?
Directors and key officers (chief executive, chief financial officer, and
actuary) must be fit and proper persons to hold office. The fit and
proper requirements include a requirement for suitable qualifications
and experience. Fit and proper standards are governed by the
Insurance (Prudential Supervision) Act 2010 and all licensed insurers
must have a fit and proper policy to ensure that all directors and key
officers appointed are fit and proper persons and that they remain fit
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and proper persons whilst continuing in office. Regulations require
three yearly (as a minimum) reviews of whether or not directors and
key officers are fit and proper persons. The Reserve Bank issued the
Fit and Proper Standard applicable under the Insurance (Prudential
Supervision) Act 2010 in June 2011.
5 Capital and surplus requirement
What are the capital and surplus requirements for insurance and
reinsurance companies?
Prudential requirements, including minimum levels of financial
strength and solvency standards, have been introduced by the
Insurance (Prudential Supervision) Act 2010. The solvency standards
include minimum capital requirements that reflect the nature of the
insurer’s business or proposed business. Separate solvency standards
have now been issued by the Reserve Bank for life insurance
businesses, non-life insurance businesses, captive insurers transacting
non-life insurance business, for AMI Insurance Limited’s non-life
insurance business, and for non-life insurance businesses in run-off.
6 Reserves
What are the requirements with respect to reserves maintained by
insurance and reinsurance companies?
Solvency standards are applied to insurers under the Insurance
(Prudential Supervision) Act 2010. The solvency standards set out
solvency requirements and reporting requirements for different types
of insurance business and include minimum solvency capital levels
for all insurers covered by that standard. For example, under the
Solvency Standard for Non-Life Insurance Businesses issued by the
Reserve Bank on 13 October 2011 the minimum solvency capital is
subject to a de minimis NZ$3 million. For life insurance businesses
under the applicable standard this figure is NZ$5 million. Solvency
standards also address solvency in catastrophic circumstances. For
example, the non-life insurance business standard seeks to protect
solvency standards from exposure to extreme events by a catastrophe
capital risk charge, which requires insurers to have catastrophe
reinsurance protection and actual solvency capital to cover a 1 in
500 year event for the accounting period from 8 September 2013 to
7 September 2005, rising to cover for a 1 in 1,000 year event from 8
September 2016 onwards.
and proper. Written approval of the bank is required for the transfer
of insurance business to another person or for the amalgamation of
an insurer with another person.
9 Financing of an acquisition
What are the requirements and restrictions regarding financing of the
acquisition of an insurance or reinsurance company?
There are no specific requirements or restrictions related to
financing of the acquisition of an insurance or reinsurance company.
Nevertheless, the Reserve Bank has pursuant to the Insurance
(Prudential Supervision) Act 2010 powers to require parties to a
proposed acquisition to provide the Bank with information pertaining
to the proposed transaction. This could include information relating
to the insurer’s ongoing ability to comply with the relevant Solvency
Standard.
10 Foreign investment
What are the requirements and restrictions concerning the investment
in an insurance or reinsurance company by foreign citizens, companies
or governments?
There are no specific requirements or restrictions on investment in
insurance or reinsurance companies by foreign citizens, companies,
or governments. The Overseas Investment Act 2005 regulates foreign
investment in New Zealand by overseas persons or governments. An
overseas person or government will require consent for an overseas
investment in sensitive land or significant business assets. Certain
criteria must be met to obtain consent under the Overseas Investment
Act, such as evidence of business experience and acumen relevant
to the overseas investment, demonstrated financial commitment to
the investment, and proof that persons with control of the relevant
overseas person are of good character.
If the investment would result in a change of control, as defined
under the Insurance (Prudential Supervision) Act 2010, then the
change of control requirements under the Act apply. Similarly, if
the investment would lead to a transfer of the insurance companies’
insurance business to another person or to an amalgamation
the provisions of the Insurance (Prudential Supervision) Act 2010
on transfer and amalgamation would apply, requiring the approval
of the Reserve Bank.
7 Product regulation
What are the regulatory requirements with respect to insurance
products offered for sale? Are some products regulated by multiple
agencies?
Marine insurance is regulated under the Marine Insurance Act 1908
and life insurance policies under the Life Insurance Act 1908.
For general insurance products there is no direct regulation of
insurance products per se. Consumer protection legislation, such as
the Fair Trading Act 1986 and the Consumer Guarantees Act 1993,
is applicable to any insurance products.
8 Change of control
What are the regulatory requirements on a change of control of
insurance and reinsurance companies? Are officers and directors of
the acquirer subject to background investigations?
11 Reinsurance agreements
What are the regulatory requirements with respect to reinsurance
agreements between insurance and reinsurance companies domiciled
in your jurisdiction?
There are no specific regulatory requirements for reinsurance
agreements within the jurisdiction. These are governed by the same
law as contracts of insurance.
12 Ceded reinsurance and retention of risk
What requirements and restrictions govern the amount of ceded
reinsurance and retention of risk by insurers?
There are no requirements and restrictions governing the amount of
ceded reinsurance and retention of risk by insurers.
Pursuant to the Insurance (Prudential Supervision) Act 2010 notice
of change of control of an insurer must be given to the Reserve
Bank. The Bank must then be decide whether it is satisfied that the
requirements for being issued with a licence remain satisfied following
change of control, including that directors and other officers are fit
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new zealand
13 Collateral
What are the collateral requirements for reinsurers in a reinsurance
transaction?
There are no collateral requirements for reinsurance companies.
14 Insolvent and financially troubled companies
What laws govern insolvent or financially troubled insurance and
reinsurance companies?
The Reserve Bank of New Zealand is now the prudential regulator of
insurers carrying on insurance business in New Zealand. The Reserve
Bank’s role includes the ongoing monitoring of insurers’ compliance
with prudential requirements and solvency standards. The Insurance
(Prudential Supervision) Act 2010 provides the Reserve Bank with a
range of powers in respect of financially troubled insurers, including
powers to require an insurer to prepare a recovery plan and the
power to give directions to an insurer. The Act also has provisions
governing the liquidation of licensed insurers, with a role for the
Reserve Bank in liquidation, statutory management, voluntary
arrangements, compromises and schemes of arrangement.
The insolvency provisions of the Companies Act 1993 apply,
subject to the provisions of the Insurance (Prudential Supervision)
Act 2010. The Insurance (Prudential Supervision) Act 2010 contains
special insolvency provisions relating to the insolvency of insurers.
The Companies Act 1993 contains provisions for the appointment
of interim (provisional) liquidators and liquidators by shareholders
and the High Court, appointment of voluntary administrators and
for the proposal of schemes of arrangement. Under the Insurance
(Prudential Supervision) Act 2010 the consent of the Reserve Bank
is needed for the voluntary liquidation of, or appointment of an
administrator to, a licensed insurer.
There is also a procedure available for companies that are deemed
at risk through reckless or fraudulent conduct. This procedure is
known as ‘statutory management’ and is commenced by order-incouncil
under the Corporations (Investigation and Management) Act
1989. A statutory manager has extensive powers including the power
to suspend payments to all creditors and there is also an extensive
moratorium in place while a statutory management order is in force.
The Insurance (Prudential Supervision) Act 2010 contains specific
provisions applicable to the statutory management of licensed
insurers.
15 Intermediaries
What are the licensing requirements for intermediaries representing
insurance and reinsurance companies?
The operations of insurance intermediaries are governed by the
Insurance Intermediaries Act 1994. All the same, that Act does not
impose any licensing requirements for intermediaries. Intermediaries
will require to be licensed as financial advisers under the Financial
Advisers Act 2008 and if placing insurance for retail clients will need
to belong to an approved dispute resolution scheme in accordance
with the requirements of the Financial Service Providers (Registration
and Dispute Resolution) Act 2008.
Insurance claims and coverage
16 Third-party actions
Can a third party bring a direct action against an insurer for coverage?
Under the Law Reform Act 1936, section 9, if the insurance contract
is an indemnity against liability to pay compensation or damages
and an event occurs that gives rise to liability to pay by the insured,
a charge is created under which the injured third party can, in some
circumstances, sue the insurer directly. Leave of the court is required
to bring such an action, unless the insured is dead, insolvent or bankrupt,
or if the insured is a company that is being wound up. Leave
will not normally be granted when there is a ‘perfectly good common
law defendant’ and an ordinary action at common law will suffice
(Campbell v MLC Fire & General Insurance Co Ltd [1971] NZLR
240). The Court of Appeal, in Gerling Australia Insurance Company
Pty Ltd v Ludgater Holdings Ltd [2009] NZCA 397, has held that
section 9 creates a charge upon the proceeds of the insurance policy
that is a chose in action. It held that as the chose in action was situated
in Australia, as the insured and the insurer had their principal
places of business in Australia, any payment under the policy was
due in Australia and the law of the policy was the law of Australia,
the New Zealand courts did not have subject matter jurisdiction to
allow a section 9 claim to proceed. The effect of this decision is to
limit the potential extraterritorial effect of section 9. The Supreme
Court upheld the Court of Appeal judgment ([2010] NZSC 49). The
High Court has recently held, in Ruscoe v Canterbury Policy Holders
(sub nom: Re Western Pacific Insurance Ltd) (2011) 9 NZBLC
103,483, that section 9 of the Law Reform Act 1936 applies to reinsurance
contracts, so that the policy holders of an insolvent insurer
have a charge under that section over reinsurance monies payable in
respect of their claims. The decision was not appealed due to a lack
of funding. The decision has been the subject of some criticism and
it is likely that the court’s decision will be challenged in the future.
Under the Contracts (Privity) Act 1982, section 4, if a contract
confers a benefit on a third party, identified by name, description, or
as a class, that third party can sue in his or her own name to enforce
the contract. This is applicable to insurance contracts.
Under the Administration Act 1969, section 26, the whole of the
estate, including any policies of insurance, are in the hands of the
administrator for payment in the ordinary course of administration.
The administrator may enforce any claims.
The Life Insurance Act 1908 provides for the assignment of the
policy and a third party to whom a policy is assigned has all the rights
and liabilities under the policy and may sue in his or her own name
on the policy assigned (section 43).
Marine insurance is assignable before or after loss and the
assignee is entitled to sue in his or her own name if the beneficial
interest has passed, unless the policy expressly prohibits assignment
(Marine Insurance Act 1908, section 51).
17 Late notice of claim
Can an insurer deny coverage based on late notice of claim without
demonstrating prejudice?
Section 9 of the Insurance Law Reform Act 1977 provides that when
the contract of insurance is a life policy and the claim relates to the
death of the insured, any provisions requiring time limits for any
claim shall not bind the insured. For any other policy, such provisions
shall only bind the insured if the failure of the insured to comply has
so prejudiced the insurer that it would be inequitable for the insured
not to be bound.
18 Wrongful denial of claim
Is an insurer subject to extra-contractual exposure for wrongful denial
of a claim?
There is no tort of wrongful denial of a claim. However, it would
be possible in some circumstances for an insured wrongly denied a
claim, or if the insurer failed to pay out on a substantiated claim,
to pursue exemplary damages in a suit in contract, if the insurer’s
conduct was sufficiently outrageous (for example, State Insurance
Ltd v Cedenco Foods Ltd (CA 216/97, Court of Appeal, 6 August
1998)).
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19 Defence of claim
What triggers a liability insurer’s duty to defend a claim?
There is no duty on a liability insurer to defend a claim. Generally,
policies provide the insurer with the right to take over defence of the
claim if it chooses to do so, in which case the insurer owes the insured
a duty under common law to conduct the defence properly. This
power enables the insurer to settle proceedings without consulting
the insured.
However, if the insurer has reinsured its liability under the
liability insurance, the insurer may prejudice its recovery from the
reinsurer if it settles a claim if a defence existed to the claim.
20 Indemnity policies
For indemnity policies, what triggers the insurer’s indemnity
obligations?
The insurer is obliged to indemnify the insured for his or her loss from
the accepted risk. For valued policies this is the value of the policy
rather than the actual loss, while for indemnity policies generally
only the actual loss is recoverable. The trigger for the obligation is
therefore the occurrence of the accepted risk resulting in loss.
instead as a punitive measure to punish a party that has acted with
outrageous and flagrant disregard for the plaintiff’s rights. Under
normal circumstances it would seem unlikely, therefore, that an
insurance agreement insuring against liability for any loss caused to
a third party would extend to cover liability for exemplary damages.
Specific language may well be required to achieve this result.
23 Excess insurer obligations
What is the obligation of an excess insurer to ‘drop down and defend’,
and pay a claim, if the primary insurer is insolvent or its coverage is
otherwise unavailable without full exhaustion of primary limits?
Whether there is an obligation on an excess insurer to drop down
and defend, and pay a claim, depends on the interpretation of the
excess insurance contract. When the contract clearly limits the excess
insurer to liability to pay the excess amount over the cover of another
insurance policy, then there is no duty to drop down and cover the
primary layer of insurance where the primary insurer is unable
to pay. When the contract provides for liability in excess of sums
‘recoverable’ or ‘collectible’ from the primary insurer, if the primary
insurer cannot pay such that no sums are recoverable or collectible,
then the excess insurer may be required to cover the primary layer.
21 Incontestability period
Is there an incontestability period beyond which a life insurer cannot
contest coverage based on misrepresentation in the application?
Under section 4 of the Insurance Law Reform Act 1977, a life
policy cannot be contested on the basis of a misrepresentation in the
application unless the representation was substantially incorrect, was
material and was made either fraudulently or within three years of
the date when the policy is sought to be avoided or the death of the
insured, whichever is earlier.
22 Punitive damages
Are punitive damages insurable?
There is no specific rule of law preventing insuring against the risk
of the award of exemplary or punitive damages. However, there is a
general principle against recognition of contracts that are contrary
to public policy. It is possible that an agreement to insure against
exemplary damages might be held to be against public policy on the
basis that insurance would defeat the purpose of the award of such
damages, which is to punish outrageous conduct.
This issue was considered by the Court of Appeal of England
and Wales in Lancashire County Council v Municipal Mutual
Insurance Ltd [1996] 140 SJLB 108. On the basis of this decision, it
appears that there is no per se prohibition against insuring exemplary
damages under UK law, although a public policy prohibition exists
if the insured’s wrongdoing rises to a sufficient level of malice or
intentional misconduct. Existing authority, though, does not clearly
define when that threshold for uninsurability is crossed. Blanchard
J in the Supreme Court (New Zealand’s highest court) noted in an
obiter comment that it seems, on the basis of Lancashire, that it
is not contrary to public policy for insurance to cover claims for
indemnity against exemplary damages (Couch v Attorney-General
[2010] NZSC 27). Although the point remains undecided, it appears
likely that under New Zealand law (following Lancashire) insurance
against exemplary damages could be taken out, although the wording
of the policy would be crucial (Todd, The Law of Torts in New
Zealand, fifth edition, 2009).
If it is possible to insure against exemplary damages the question
of whether an award of exemplary damages is insured under an
insurance agreement is a question of construction of that agreement.
Exemplary damages are awarded not to compensate for loss, but
24 Claim priority
What is the order of priority for payment when there are multiple
claims under the same policy?
The order for priority of payment when there are multiple claims
under the same policy is individually and successively.
25 Allocation of payment
How are payments allocated among multiple policies triggered by the
same claim?
When there is more than one insurance policy covering the same
subject matter, interest and risk that is in force and legally binding at
the time the claim is triggered, each of the insurers under the different
policies will be liable to contribute to the payment of the claim. There
is more than one method that has been used for determining the
contributions, and no one method can be said to be determinative in
all cases. In each case the court will have to make a decision based
on the particular facts of that case and the relative equities involved.
For marine insurance, section 80 of the Marine Insurance Act
1908 provides that if the assured is overinsured by double insurance,
each insurer is bound, as between itself and the other insurers, to
contribute rateably to the loss in proportion to the amount for which
it is liable under its contract.
Reinsurance
26 Reinsurance disputes
Are formal reinsurance disputes common, or do insurers tend to prefer
business solutions for their disputes without formal proceedings?
Formal reinsurance disputes are extremely rare. Most reinsurers
are based offshore and reinsurance contracts are often governed by
foreign law. There is one reported judgment on a reinsurance dispute
in the New Zealand official law reports (Farmers’ Mutual Insurance
Ltd v QBE Insurance International Ltd [1993] 3 NZLR 305). This
involved direct insurers writing reinsurance business.
Arbitration and litigation are used for formal dispute resolution
in a range of commercial disputes, including insurance and
reinsurance disputes. New Zealand arbitrators and judges would
draw on English and Australian case law, where necessary, to assist
in determining reinsurance disputes under New Zealand law.
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27 Common dispute issues
What are the most common issues that arise in reinsurance disputes?
None. Whenever there is an ongoing professional reinsurance
relationship, then that relationship would tend to prevail over
contractual relationships.
28 Arbitration awards
Do reinsurance arbitration awards typically include the reasoning for
the decision?
Under the rules set out in the Arbitration Act 1996, an award has
to state the reasons upon which it is based, unless the parties have
agreed that no reasons are to be given, or unless the award records a
settlement made by the parties in the course of the arbitration.
29 Power of arbitrators
What powers do reinsurance arbitrators have over non-parties to the
arbitration agreement?
Arbitrators do not have powers over third parties to the arbitration
agreement. However, the Arbitration Act 1996 does allow the
arbitrator to seek the assistance of the courts to make orders that
will bind third parties, for example, in compelling witnesses to attend
and give evidence or produce documents.
30 Appeal of arbitration awards
Can parties to reinsurance arbitrations seek to vacate or confirm
arbitration awards through the judicial system? What level of
deference does the judiciary give to arbitral awards?
Under the rules set out in the Arbitration Act 1996, and the High
Court Rules, a party to an arbitral award can seek to set aside
the award only in narrowly defined circumstances, that is, on any
question of law arising out of an award, unless the parties have
contracted out of that jurisdiction. An application to set aside an
award is made to the High Court.
In general […] the courts will be reluctant to second-guess
arbitrators on legal matters unless (i) the error is clear and
material, (ii) the point will have precedential value or is
strongly arguable, and (iii) the application can survive a
gauntlet of other potentially disqualifying factors. [RL
Fisher QC, Appeals on questions of law; Auckland, NZ,
9 June 2006]
The Arbitrators and Mediators Institute of New Zealand (AMINZ)
has also adopted the AMINZ Arbitration Appeal Rules. These rules
provide for the establishment of Arbitration Appeal Tribunals by the
AMINZ Court of Arbitration. Arbitral awards may be appealed to
an AAT only on questions of law and only if both parties have agreed
to submit to the AMINZ Arbitration Appeal Rules.
The Tribunal has been operative since early 2009.
Reinsurance principles and practices
31 Obligation to follow cedent
Does a reinsurer have an obligation to follow its cedent’s underwriting
fortunes and claims payments or settlements in the absence of an
express contractual provision? Where such an obligation exists, what
is the scope of the obligation, and what defences are available to a
reinsurer?
There are no statutory terms regulating reinsurance contracts, so this
issue falls to be determined under the applicable common law and
the terms of the specific reinsurance agreement. In the absence of
an express contractual provision there must be legal liability, either
proved or admitted, of the reinsurer to the cedent for the reinsurer
to be liable.
A contract may contain a clause obliging the reinsurer to follow
the cedent’s settlement decisions. The effect of these clauses depends
on interpretation of the clause. Under a ‘follow the fortunes’ clause,
a reinsurer is bound by the insurer’s settlement where the claim falls
within the reinsured risk and the insurer has acted honestly and in a
proper and business-like manner in effecting settlement (see Farmers’
Mutual, noted above, at pp309-310). To avoid liability the onus is
on the reinsurer to prove bad faith or unprofessional behaviour in
effecting settlement.
32 Good faith
Is a duty of utmost good faith implied in reinsurance agreements? If
so, please describe that duty in comparison to the duty of good faith
applicable to other commercial agreements.
As with any insurance agreement, a duty of utmost good faith applies
to reinsurance agreements under the common law. If one party does
not observe the utmost good faith then the other party may avoid the
contract. The most frequent application of this principle is when one
party has failed or omitted to disclose a material fact or has made an
innocent misrepresentation of a material fact. Under the Insurance
Law Reform Act 1977, however, an insurer cannot avoid a contract
because of an immaterial written misrepresentation based on a
warranty in the insurance contract that all the insured’s statements,
material or immaterial, are accurate. In commercial agreements
generally there is no implied term of good faith, though it is possible
for such a term to be expressly included in, or implied into, a contract.
When there is such a term, breach of a duty of good faith does not, as
with any term, automatically give rise to a right to avoid the contract.
Instead the usual rules set out in the Contractual Remedies Act 1979
apply to determine whether a right of cancellation arises on the facts.
In Wellington City Council v Body Corporate 51702 and Alirae
Enterprises Ltd [2002] 3 NZLR 486 (CA), the court emphasised
that the enforceability of good faith obligations will depend on their
terms and particularly on the specificity of those terms.
33 Facultative reinsurance and treaty reinsurance
Is there a different set of laws for facultative reinsurance and treaty
reinsurance?
The common law governs reinsurance. Under the common law the
main significance of facultative reinsurance in relation to treaty
reinsurance is in the formation of a contract for reinsurance. Treaty
reinsurance binds the reinsurer to accept all the risks of the class of
business specified by the treaty and the reinsured to cede all such
risks to the reinsurer. Facultative reinsurance leaves the parties
free to choose whether to cede and accept any particular risk. The
difference, therefore, is simply in determining the obligations of the
parties to enter into reinsurance agreements for a particular risk or
class of risks. Once such an agreement is entered into, the usual law
governing contracts generally and contracts of insurance applies
equally to the agreement.
34 Third-party action
Can a policyholder or non-signatory to a reinsurance agreement bring
a direct action against a reinsurer for coverage?
For marine insurance, the Marine Insurance Act 1908 provides that
unless the policy otherwise provides, the original assured has no right
or interest in respect of reinsurance.
For general insurance, under ordinary circumstances a
policyholder to an insurance agreement would not be able to able
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new zealand
Buddle Findlay
Update and trends
Fallout from the Canterbury earthquakes remains the hot topic in
insurance within New Zealand. Between 4 September 2010 and 4
November 2011 there have been 14 separate earthquake events
and more than 7,000 aftershocks. Approximately 400,000 claims
have been lodged with the Earthquake Commission (EQC) and
as at 30 June 2011 the EQC’s liabilities exceeded its assets by
approximately NZ$1.1 billion. The EQC rates are likely to increase
threefold and increased reinsurance costs are likely to be passed
onto policy holders by other insurers.
Legal issues that have arisen include the interpretation
of reinstatement of sum insured conditions between the two
major earthquakes and whether business interruption policies
cover only interruption caused by damage to insured building, or
whether the wider area damage and loss of attraction are to be
taken into account. The Ruscoe v Canterbury Policy Holders case,
which as discussed in this chapter held that section 9 of the Law
Reform Act 1936 applies to reinsurance contracts, was litigation
arising from the Canterbury earthquakes. One insurer adversely
affected by Canterbury earthquake claims, Ansvar, has proposed
a ‘contingent’ creditors’ scheme of arrangement that is being
considered by creditors as this chapter goes to print.
The Solvency Standards for insurers issued by the Reserve
Bank under the Insurance (Prudential Supervision) Act 2010 were
also affected by the earthquakes. The planned standard for a
catastrophe capital risk charge at a 1 in 1,000 year event for the
non-life insurance business standard was initially relaxed to a 1 in
500 year standard, transitioning to a 1 in 1,000 year standard by
8 September 2016.
to bring a direct action against the reinsurer of the risk covered by
the agreement. The reinsurance agreement is a separate contract
for the benefit of the reinsured, rather than for the benefit of the
original insured party. However, if the reinsurance agreement confers
or purports to confer a benefit on the original insured, the original
insured could sue to enforce the reinsurance agreement directly
under the Contracts (Privity) Act 1982. When the insurer is insolvent
the High Court has recently held, in Ruscoe v Canterbury Policy
Holders, that policy holders have a right of action directly against
reinsurers under section 9 of the Law Reform Act 1936.
35 Insolvent insurer
What is the obligation of a reinsurer to pay a policyholder’s claim
where the insurer is insolvent and cannot pay?
The Insurance (Prudential Supervision) Act 2010 contains provisions
for the insolvency of licensed insurers. As noted above, when the
insurer is insolvent the High Court has recently held, in Ruscoe v
Canterbury Policy Holders, that policy holders have a right of action
directly against reinsurers under section 9 of the Law reform Act
1936. Under that section the insured would have a first charge over
any reinsurance monies payable in respect of a claim made under
his or her policy.
36 Notice and information
What type of notice and information must a cedent typically provide
its reinsurer with respect to an underlying claim? If the cedent fails to
provide timely or sufficient notice, what remedies are available to a
reinsurer?
There is no regulatory requirement as to the form of notice or information
that a cedent must supply, so this is governed by the reinsurance
agreement and the application of the law of contract to it.
Claims cooperation clauses in reinsurance contracts can assist
reinsurers to require from cedents early notification of possible
claims. The normal contractual remedies will be available to the
reinsurer if the cedent fails to comply with the requirements of the
reinsurance contract in this respect.
37 Allocation of underlying claim payments or settlements
Where an underlying loss or claim triggers multiple reinsured policies,
how does the reinsured allocate its claims or settlement payments
among those policies?
As a basic principle liability under an insurance contract arises only
when a claim is established by judgment of the courts, an arbitral
award, or by agreement. Until a claim is established in this way the
right to indemnity does not arise: Post Office v Norwich Union
Insurance Co Ltd [1967] 2 QB 363 (CA). Usually liability under a
reinsurance contract will not be triggered until the right to indemnity
under the reinsured insurance contract is engaged. As a general
principle allocation of a reinsured’s claims or settlement payments
would be made as the right to indemnity arises under each policy.
This would be subject to the terms of both the insurance contracts
and the reinsurance contracts. The reinsured has no control over
this process save to the extent that the reinsured is able to accelerate
its own liability by prompt agreement, where appropriate and
consistent with its good faith obligations, or to delay the obligation
to indemnify by litigation or arbitration directed towards the establishment
of liability (Teal Assurance Company Ltd v W R Berkley
Insurance (Europe) Ltd [2011] EWCA Civ 1570).
When the reinsured has sufficient funds from reinsurance and its
Scott Barker
Peter Niven
Sebastian Bisley
scott.barker@buddlefindlay.com
peter.niven@buddlefindlay.com
sebastian.bisley@buddlefindlay.com
State Insurance Tower Tel: +64 4 499 4242
1 Willis Street Fax: +64 4 499 4141
Wellington 6011
www.buddlefindlay.com
New Zealand
142 Getting the Deal Through – Insurance & Reinsurance 2012

Buddle Findlay
new zealand
own reserves to meet all claims this issue would not be important.
When reserves and reinsurance will be insufficient to meet all claims,
such that the reinsured is likely to become insolvent before all claims
are satisfied, this approach can lead to an inequitable outcome as
between the insured policy holders. Under the Insurance (Prudential
Supervision) Act 2010, and the Solvency Standards prescribed under
the Act, an insurer has reporting obligations when it becomes reasonably
foreseeable that the insurer will become insolvent within a three
year period. The Reserve Bank has a range of powers available to
it in these circumstances, including the power to apply to the High
Court to have the insurer placed into liquidation.
If the reinsurer is placed into liquidation, then on the basis of the
High Court’s decision in Ruscoe v Canterbury Policy Holder, insured
policy holders would have a charge over remaining reinsurance monies
under section 9 of the Law Reform Act 1936. Priority amongst
policy holders would depend on the time at which the charge arose
in respect of their claim as opposed to the time the other policy holders’
charges arose.
38 Review
What type of review does the governing law afford reinsurers with
respect to a cedent’s claims handling, and settlement and allocation
decisions?
There is no specific provision for review of a cedent’s claims handling,
settlement and allocation decisions. The reinsurance contract will
govern what information the cedent is required to give to the
reinsurer with respect to claims.
39 Reimbursing of commutation payments
What type of obligation does a reinsurer have to reimburse a cedent
for commutation payments? Must a reinsurer indemnify its cedent for
‘incurred but not reported’ claims?
Obligations with respect to commutation payments by the cedent
are governed by the terms of the contract. Indemnifying the cedent
in respect of IBNR can be controversial, but would generally be a
matter for negotiation unless expressly provided for.
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