Chapter 40 - Understanding Reinsurance

Chapter 40 

UNDERSTANDING REINSURANCE 

I. OVERVIEW 

40.01 Scope 

* 

by David M. Raim and Joy L. Langford 

40.02 Key Practice Insights 

40.03 Master Checklist 

II. APPRECIATING PURPOSE OF REINSURANCE 

40.04 Types of Reinsurance 

40.04[1] Facultative vs. Treaty 

40.04[2] Proportional vs. Non-proportional 

40.04[3] Catastrophe Reinsurance 

40.04[4] Finite Reinsurance 

40.04[5] Fronting Arrangements 

40.05 Lack of Privity of Contracts 

40.05[1] Know General Rule 

40.05[2] Consider Cut-Throughs 

III. CONSIDERING REINSURANCE REGULATION 

40.06 Credit for Reinsurance 

40.07 Letters of Credit 

40.08 Insolvency Clause 

IV. CONSIDERING INSURER’S OBLIGATIONS TO REINSURERS IN CASE 

OF CLAIM 

40.09 Consider Insurer’s Notice Obligations 

40.09[1] Know What Notice Clause Requires

New Appleman Insurance Practice Guide 

40.09[2] Reinsurer’s Assertion of Late Notice As Defense to Payment 

of Its Reinsurance Obligations 

40.09[2][a] Jurisdictions Requiring Proof of Prejudice 

40.09[2][b] Jurisdictions Recognizing Late Notice As Defense 

Regardless of Ability to Prove Prejudice 

40.10 Consider Reinsurer’s Right to Access Insurer’s Records 

40.10[1] Consider What Access to Records Clause Requires to Be 

Made Available to Reinsurer 

40.10[2] Consider Whether Insurer’s Disclosure of Privileged 

Documents to Its Reinsurer Constitutes Waiver As to Third 

Parties, Including Its Insureds 

40.10[2][a] Common Interest Doctrine 

40.10[2][b] Disclosure Made Prior To Insurance Coverage 

Litigation 

40.10[2][c] Disclosure Made During Course of Insurance 

Coverage Litigation 

40.10[2][d] Disclosure Made After Resolution of Insurance 

Coverage Litigation But Prior to Institution of 

Arbitration or Litigation Between Cedent And Reinsurer 

40.10[2][e] Disclosure Made During Course of Reinsurance 

Litigation 

40.10[2][f] Use of Confidentiality and Common Interest 

Agreements 

40.10[3] Consider Reinsurer’s Ability to Compel Production of 

Cedent’s Privileged Documents 

40.10[3][a] Consider Whether Inclusion of Access to Records 

Clause Constitutes Waiver 

40.10[3][b] Know When Privileged Documents Are “In Issue” 

Therefore Requiring Production by Cedent 

40.10[3][c] Consider Application of Common Interest Doctrine to 

Compel Production of Cedent’s Privileged Documents 

40.10[3][c][i] Prior to Dispute Between Cedent and Reinsurer 

40.10[3][c][ii] During Reinsurance Dispute Between Cedent and 

Reinsurer 

40.10[4] Understand When Insured Is Entitled to Discover Its Insurer’s 

Reinsurance Information 

40.11 Consider Reinsurer’s Rights Under Right to Associate Clause 

or Claims Control Clause 

40-2

Understanding Reinsurance 

V. CONSIDERING REINSURER’S OBLIGATIONS 

40.12 Determine Extent of Coverage 

40.13 Consider Obligation to Reimburse Insurer for Declaratory 

Judgment Expense 

40.14 Consider Obligation to Reimburse Insurer for Extra- 

Contractual Obligations and Excess of Policy Limits (“ECO/ 

XPL”) Damages 

VI. CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE 

FIDEI 

40.15 Consider Insurer’s Duty to Disclose to Reinsurer All Material 

Facts About Risk Being Reinsured 

40.16 Consider Application of Duty of Utmost Good Faith Beyond 

Disclosure at Inception of Reinsurance Relationship 

40.16[1] Application of Duty of Utmost Good Faith to Parties’ 

Conduct During Life of Reinsurance Contract 

40.16[2] Application of Duty of Utmost Good Faith to Underwriting 

and Administration of Ongoing Business 

40.16[3] Application of Duty of Utmost Good Faith to Obligation to 

Give Notice of Claim 

40.16[4] Application of Duty of Utmost Good Faith to Reinsurer to 

Pay Under Reinsurance Agreement 

VII. CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE 

SETTLEMENTS 

40.17 Understand Distinction Between Follow the Fortunes and 

Follow the Settlements 

40.18 Consider Reinsurer’s Preclusion from Second-Guessing 

Reinsured’s Good Faith Claims Decisions 

40.19 Consider Application of Follow the Fortunes/Follow the 

Settlements to Allocation Decisions 

VIII. CONSIDERING BROKERED MARKET 

40.20 Brokered vs. Direct Market 

40.21 Understand Which Entity Broker Represents 


IX. CONSIDERING REINSURANCE ARBITRATION 

40.22 Consider Obligation to Arbitrate 

40.23 Neutral Panel or Party Advocate System 

40.24 Strict Rule of Law vs. Obligations Pursuant to Honorable 

Engagement 

40.25 Discovery in Arbitration 

40.26 Summary Disposition in Arbitration 

40.27 Reasoned Awards 

40.28 Know When to Move to Vacate or Affirm Arbitration Award 

40.29 ARIAS Forms 

X. FORMS 

New Appleman Insurance Practice Guide 

40.30 BRMA Reinsuring Clause Form 44 C (Quota Share 

Agreement) 

40.31 BRMA Reinsuring Clause Form 44 B (Surplus Share 

Agreement) 

40.32 BRMA Reinsuring Clause Form 61 C (Excess of Loss 

Agreement) 

40.33 BRMA Unauthorized Reinsurance Clause Form 55 A 

40.34 BRMA Insolvency Clause Form 19 M 

40.35 BRMA Offset Clause Form 36 A 

40.36 BRMA Loss Notice Clause Form 26 B 

40.37 Notice of Loss Clause Incorporating Right to Associate 

40.38 BRMA Loss Notice Clause Form 26 A 

40.39 BRMA Access to Records Clause Form 1 B 

40.40 BRMA Confidentiality Clause Form 69 D 

40.41 BRMA Claims Cooperation Clause Form 8 A 

40.42 BRMA Excess of Original Policy Limits Clause Form 15 A 

40.43 BRMA Extra Contractual Obligations Clause Form 16 D 

40.44 BRMA Intermediary Clause Form 23 A 

40.45 BRMA Arbitration Clause Form 6 A 

40.46 BRMA Arbitration Clause Form 6 E 

40.47 ARIAS-U.S. Umpire Questionnaire Sample Form 2.1 


I. OVERVIEW. 

40.01 Scope. In essence, reinsurance is insurance for insurance companies. 

It is a contractual arrangement under which an insurer secures 

coverage from a reinsurer for a potential loss to which it is exposed under 

insurance policies issued to original insureds. The risk indemnified 

against is the risk that the insurer will have to pay on the underlying 

insured risk. Because reinsurance is a contract of indemnity, absent specific 

cash-call provisions, the reinsurer is not required to pay under the contract 

until after the original insurer has paid a loss to its original insured. 

Reinsurance enhances the fundamental financial risk-spreading function 

of insurance and serves at least four basic functions for the direct 

insurance company: increasing the capacity to write insurance (under 

prevailing insurance-regulatory law); stabilizing financial results in the 

same manner that insurance protects any other purchaser against spikes 

from realized financial losses; protecting against catastrophic losses; and 

financing growth. 

The reinsurance relationship is structured in the following manner: 

original insured > insurer > reinsurer. The insurer is called, for reinsurance 

purposes, the cedent (or cedant). There is typically no contractual relationship 

between the reinsurer and the original insured. Reinsurance may, 

but need not, dovetail with the scope of the original insurance. Basically, 

all of the risks that are insured can be reinsured, unless contrary to public 

policy under the relevant governing law for the reinsurance contract. 

This chapter principally discusses how insurance claims and coverage 

litigation can evolve into reinsurance claims and in that context presents 

the most common legal issues that arise from reinsurance relationships. 

The coverage afforded insurers through the most commonly purchased 

types of reinsurance is explained to provide a context for most reinsurance 

claims. Certain aspects of reinsurance regulation are set forth to illustrate 

the role of reinsurance in the entire insurance scheme and the payment of 

policyholder claims. Also described are the special rights and obligations 

of cedents and reinsurers as between them and important aspects of 

reinsurance arbitration (the common form of dispute resolution), both of 

which strongly influence reinsurance recoveries. This chapter provides a 

background in reinsurance and explains how an insured’s relationship 

with its insurer fits within the context of the entire reinsurance scheme. 

Reinsurance, like many areas of business law, has a language of its own. 

The insurance company purchasing reinsurance is called the “ceding 

company” (or the “cedent” (or “cedant”), “reinsured” or “ceding insurer”) 

because it “cedes” or transfers part of the risk. The company selling 


40.01 New Appleman Insurance Practice Guide 

reinsurance is called the “reinsurer”. Typically, these are the only parties to 

the reinsurance agreement; all rights and obligations run only between 

them. The reinsurance contract does not change the direct, or original, 

insurer’s responsibility to its policyholder (the “original insured” or 

“policyholder”), and the insurer must fulfill the terms of its policy whether 

or not it has reinsurance or whether or not the reinsurer is rightly or 

wrongly refusing to perform. The liability or risk ceded is called a 

“cession,” and the original policy that the cedent issues to a policyholder 

is referred to as “direct” insurance. A reinsurer also can purchase its own 

reinsurance protection, and such reinsurance of reinsurance is called a 

“retrocession.” A reinsurer that transfers all or part of its assumed 

reinsurance is called a “retrocedent,” and the company reinsuring this risk 

is called the “retrocessionaire.” Retrocessions need not incorporate the 

original reinsurance and often do not. (Retrocessionaires in turn can 

purchase reinsurance again, ad infinitum.) 

Reinsurance relationships can be simple or complex. A cedent can cede 

certain loss exposures under one contract or purchase several contracts 

covering different aspects or portions of the same policy to achieve the 

desired degree of coverage. A layering process involving two or more 

reinsurance agreements is commonly employed to obtain sufficient monetary 

limits of reinsurance protection. When a claim is presented, the 

reinsurers respond in a predetermined order to cover the loss. 

The reinsurance relationship is evidenced by a written contract reflecting 

the negotiated terms. Although reinsurance contracts between different 

cedents and reinsurers can include clauses with similar purposes, the 

wording of particular provisions varies significantly, depending on the 

parties’ specific needs, customs and practices. Sample clauses are provided 

where instructive. 

Payments that are due pursuant to a reinsurance agreement are considered 

an asset of the cedent; in contrast to other types of contingent 

payments, the applicable regulatory regime may permit the cedent to 

count a reinsurance recoverable as a present asset on its own balance 

sheet. Reinsurance is payable only after the cedent has paid losses due 

under its own insurance agreements. However, most U.S. reinsurance 

contracts include an insolvency clause, which allows the receiver of an 

insolvent insurer to collect on reinsurance contracts as if the insolvent 

insurer had paid the claim in full even if it did not [see § 40.08 below 

discussing the insolvency clause]. 

Reinsurance should not be confused with other commercial arrangements. 

It is not co-insurance, where separate insurers assume shares of the same 

insurance risk. Nor is it a novation as between the original insured and its 


Understanding Reinsurance 40.01 

insurer or substitution of one insurer for another. A reinsurance agreement 

does not establish a partnership between the insurer and the reinsurer or 

a separate joint venture as between them, although some pro rata contracts 

provide that the parties share proportionally in the premiums collected by 

the cedent and in losses paid by it. Reinsurance ordinarily does not confer 

third-party beneficiary status on the original insured. Absent a “cutthrough” 

clause or similar modification [see § 40.05 below for discussion of 

these exceptions], there is no privity of contract between the insurance 

policyholder and the reinsurer. In the absence of language in the reinsurance 

agreement granting the original insured rights against the reinsurer 

or unusual factual circumstances, attempts by original insureds to sue 

reinsurers directly generally fail; claimants against the original insureds 

similarly are unsuccessful in bringing suit directly against reinsurers, even 

where, in direct-action states or in other circumstances, the claimant might 

be able to sustain an action against the original insurer (cedent). 

Underlying claims and coverage litigation can trigger reporting and notice 

obligations of cedents to reinsurers. Reinsurers that potentially owe 

indemnity may commence investigations, monitor claims, and establish 

claim reserves. Counsel for original insureds in coverage litigation sometimes 

seek production of communications generated between the cedent 

and reinsurer on the grounds that insurance covering a defendant is 

generally discoverable (even though in the circumstance the “insurance” 

is reinsurance), or for more narrowly tailored purposes such as to collect 

evidence that the original insurance policy existed at one time even if it is 

no longer is available. In some instances, the disclosure of cedent/ 

reinsurer communications can potentially be detrimental to the cedent’s 

coverage position vis-a-vis its insured. 

Typical reinsurance claim issues that are discussed here include: reporting 

and notice obligations; defenses stemming from interpretation of the 

reinsurance wording to the indemnity sought; cooperation and claimhandling 

obligations; and defenses seeking rescission of the reinsurance 

contract including nondisclosure and misrepresentation with respect to 

the details of risk. The nature of the reinsurance relationship — especially 

the notion of “utmost good faith” or uberimae fidei — may provide a gloss 

on how certain issues get resolved in the reinsurance context that may 

differ from how similar issues are resolved in the ordinary insured-insurer 

context. Other common issues addressed here include the reinsurer’s 

obligations to indemnify the insurer for declaratory judgment expenses 

incurred in defending or prosecuting coverage litigation against the 

original insured, and payments by insurers in excess of policy limits or 

payments of extracontractual damages. 



Reinsurance claims generate certain legal issues distinct from issues that 

typically arise in the context of direct insurance. Rules found in insurance 

law in different arenas may not apply or may apply with different nuances 

in the context of reinsurance disputes, and the duties and obligations 

between a cedent and reinsurer may differ from those between an original 

insurer and policyholder, considering some of the differences in the 

relative sophistication and bargaining power, custom and practice, or 

different aspects in which one party is largely dependent upon another. 

Several important distinctions between the resolution of insurance and 

reinsurance disputes are examined in this chapter, including the effect of 

the bilateral duty of utmost good faith, which is perhaps unique to 

reinsurance agreements. Reinsurance disputes also are distinguished by 

their typical resolution through arbitration, rather than courtroom litigation. 

Among other differences, in typical U.S. arbitrations, the availability 

and weight of legal precedent is less predictable and meaningful than in 

litigation in the courts. Arbitrators may not be bound by strict legal rules 

and do not always strictly apply contract law and other legal principles to 

reinsurance agreements; indeed, some reinsurance contracts eschew reliance 

upon legal rules in favor of construing the reinsurance relationship 

memorialized by the reinsurance contract as principally an honorable 

engagement pursuant to industry custom and practice. 

Lexis.com Searches: To find statistics on reinsurance premiums, try 

this source: RDS TableBase. Enter this search: PUB(Reinsurance). 

To find articles on specific cases involving reinsurance, try this source: 

Reinsurance: Mealey’s Litigation Report. Enter specific search terms or 

date ranges. 

40.02 Key Practice Insights. The parties to reinsurance contracts are 

typically sophisticated insurers transferring the financial risk assumed in 

insuring businesses, homes, cars and individuals. Note that sometimes 

reinsurers create the instrument that is to be sold to an insured and then 

look for a middleman (cedent) to (i) issue the policy to the insured and (ii) 

purchase the corresponding reinsurance. Indeed, in such transactions, 

sometimes the cedent will 100 percent reinsure the risk undertaken to the 

policyholder, in exchange for a ceding commission deducted from the 

premium collected from the direct insured, which is ultimately passed on 

to the reinsurer. 

There are no standard reinsurance contracts, although many include 

commonly used provisions and clauses sometimes required by state law. 

Each reinsurance treaty or facultative certificate reflects the special needs 

of the parties with respect to the type and amount of risk covered, the 



calculation of the premium, the role of the reinsurance intermediary, the 

method and timing of notice and submission of claims, various reporting 

obligations, and resolution mechanisms for potential disputes. Reinsurance 

contracts therefore are often complex and unique and must be 

carefully drafted and, in the event of dispute, carefully interpreted. 

Lawyers practicing in the reinsurance field must become familiar with the 

specialized business of reinsurance, including the purposes and types of 

reinsurance and the financial goals and consequences typically involved. 

Practitioners also must be knowledgeable about the meaning, use and 

legal effect of commonly employed reinsurance contract provisions, 

including insolvency, access to records, claims control, notice, extracontractual 

obligations (“ECO”), excess of policy limits (“XPL”), follow 

the fortunes/settlements, intermediary and arbitration provisions. Attorneys 

also should carefully review complete versions of reinsurance 

wordings, including endorsements and amendments. (Indeed, sorting out 

which is the governing wording particularly when insurers operating in 

different markets or in different countries are involved can prove tedious 

and time consuming.) 

Although regulation of the reinsurance industry in the United States is 

more limited than that of the insurance industry in general, lawyers 

should be mindful of the insurer’s statutory licensing, solvency and 

accounting requirements. Attorneys should understand how insurers 

must account for finite risk reinsurance, as this subject recently has 

attracted significant regulatory attention. Also of particular concern are 

“fronting” arrangements and cut-through endorsements, which may not 

be allowed or may be subject to special regulations in certain jurisdictions. 

Reinsurance disputes are typically resolved through arbitration, and 

practitioners should be familiar with arbitration law, particularly the 

Federal Arbitration Act (“FAA”) and statutory law applicable to nonadmitted 

reinsurers and the availability of pre-answer or pre-judgment 

security. Of course, counsel handling a dispute should be familiar with 

how reinsurance arbitrations are generally handled. A thorough knowledge 

of the reinsurance industry is needed as many issues are decided 

based upon the custom and practice in the industry (especially where the 

arbitration panel is comprised of non-lawyers, as is often the case). 

Lawyers also should know that leading industry and professional organizations 

offer practice guides, forms, and other resources useful for 

reinsurance arbitrations (such as lists of professional trained reinsurance 

arbitrators). 



40.03 Master Checklist. 

□ Understand whether the reinsurance contract at issue is a facultative 

certificate or a treaty. 

Discussion: § 40.04[1] 

□ Understand whether the reinsurance at issue is proportional or 

non-proportional. 


Forms: §§ 40.30-40.32 

□ Become familiar with specific types of reinsurance such as catastrophe 

reinsurance, clash cover and finite reinsurance. 

Discussion: §§ 40.04[3]-40.04[4] 

□ Understand how insurers must account for finite risk reinsurance 

under applicable regulations. 


□ Determine all of the parties’ responsibilities and liabilities in a 

fronting arrangement, including any obligation to monitor a managing 

general agency. 


□ Confirm that fronting is permissible in the jurisdiction where the 

arrangement is executed. 


□ Determine if special circumstances exist which may provide 

grounds for a policyholder of the ceding insurer to assert a direct 

action against the reinsurer. 


□ Research the legality and enforceability of cut-through clauses (or 

assumption of liability endorsements) contained in insurance contracts 

covered by reinsurance. 


□ Understand the credit for reinsurance laws governing your reinsurance 

transaction. 


Discussion: § 40.06 

□ Confirm that a letter of credit obtained by a ceding company that 

intends to take financial statement credit for reinsurance placed 

with a non-admitted reinsurer complies with statutory requirements. 


□ Ensure that an adequate insolvency clause is included in the 

reinsurance contract if required in your jurisdiction. Most states 

require that the reinsurance contract include an insolvency clause 

for the ceding insurer to take credit for reinsurance on its financial 

statement. 


Form: § 40.34 

□ Understand the effect of an offset clause, or any applicable common 

law or statutory set-off rights, on the rights and obligations under 

the reinsurance agreement. 



□ Understand the requirements of the reinsurance contract’s notice 

provision. 



□ Determine whether, in your jurisdiction, the reinsurer must demonstrate 

prejudice in order to successfully assert a late notice 

defense. 


□ Understand the effect of an access to records clause in the reinsurance 

agreement. 




□ If your client is the ceding insurer, beware the consequences of 



disclosing privileged information to reinsurers pursuant to an 

access to records clause. 


□ Research the applicability in your jurisdiction of the common 

interest doctrine to a cedent’s disclosure of privileged communications 

to its reinsurer. 

Discussion § 40.10[2] 

□ Determine whether the parties to a reinsurance contract should 

execute a confidentiality or common interest agreement to try to 

preserve applicable privileges or immunities against disclosure to 

third parties. 

Discussion: § 40.10[2][f] 

□ Understand the circumstances under which a reinsurer can compel 

disclosure of its cedent’s privileged communications. 


□ Understand the circumstances under which an insured will be 

entitled to discover its insurer’s reinsurance information. 


□ Become familiar with the rights and obligations presented by right 

to associate and claims control clauses in reinsurance contracts. 


Forms: § 40.41 

□ Draft the reinsuring or business covered clause of the reinsurance 

agreement carefully to avoid disputes concerning the scope of 

coverage. 


□ Understand whether the reinsurance contract wording (in many 

cases the definition of “allocated loss expenses”) obligates the 

reinsurer to reimburse its cedent for declaratory judgment expenses. 


□ Understand the coverage provided by excess of policy limits 


(“XPL”) and/or extra-contractual obligations (“ECO”) clauses in 

the reinsurance contract. 



□ Understand the duty of utmost good faith that is central to the 

relationship between cedent and reinsurer. 


□ If your client is the cedent, determine the facts that must be 

disclosed during the underwriting process. 


□ If your client is the cedent, ensure that all proper and businesslike 

steps are taken in underwriting the underlying business and in 

settling claims. 


□ Understand the effect of follow the fortunes or follow the settlements 

wording in the reinsurance contract. 


� Cross References: §§ 40.18-40.19 

□ Determine the extent to which follow the fortunes or follow the 

settlements language in the reinsurance contract requires a reinsurer 

to follow its cedent’s allocation and aggregation decisions as 

respects it direct insurance obligations. 


□ Understand the obligations of the reinsurance intermediary. 


□ Determine whether, and for what purposes, the reinsurance broker 

or intermediary is the agent of the ceding company, the reinsurer, 

or both parties. 






□ Understand what disputes are arbitrable under the reinsurance 

contract’s arbitration clause. 



□ In drafting reinsurance agreements, counsel should determine 

whether the scope of the arbitration clause in the reinsurance 

contract is intended to be broad or narrow. 



□ Arbitration counsel should consider whether non-signatories to the 

arbitration agreement may be forced to arbitrate. 


□ Consider whether or not to include consolidation and joinder 

provisions in an arbitration agreement, or whether to request 

consolidation once arbitration has commenced. 



□ Consider what procedures should be included in the arbitration 

provision concerning the selection of arbitrators and/or umpires, 

what qualifications the arbiters should have, and whether the 

arbiters should be neutral or non-neutral. 


□ Make certain that your client appoints its arbiter on a timely basis. 


□ Become familiar with the standards and procedures for selecting 

arbitrators and the lists of qualified individuals published by 

arbitration and reinsurance organizations. 



□ Understand the effect of any honorable engagement wording in the 


einsurance agreement. 



□ Counsel drafting a reinsurance contract should determine whether 

specific discovery procedures should be included in the reinsurance 

contract’s arbitration provision and, if so, whether they 

should incorporate any procedures published by reinsurance or 

arbitration organizations. 


□ Counsel should determine how and whether a reinsurance intermediary 

can be required to participate in the discovery process in 

the event of a reinsurance arbitration. 


□ Arbitration counsel should consider whether to submit a motion 

for summary disposition of a reinsurance claim or dispute. 


□ Arbitration counsel should consider whether to move to confirm a 

favorable arbitration award in court. 


□ Arbitration counsel should consider whether grounds exist to 

move to vacate an arbitration award in court. 


□ Arbitration counsel should consider whether there are grounds to 

request a court to modify or correct an arbitral award. 


□ Become familiar with the forms provided by ARIAS. 





II. APPRECIATING PURPOSE OF REINSURANCE. 

40.04 Types of Reinsurance. 

40.04[1] Facultative vs. Treaty. There are two basic types of reinsurance: 

“treaty” and “facultative.” Facultative reinsurance is a contract 

only covering all or part of a single specific policy of insurance. For 

each transaction sought to be reinsured, the reinsurer reserves the 

“faculty” to accept or decline all or part of any insurance policy 

presented, and the cedent chooses whether to secure reinsurance for 

a particular policy. The reinsurer and cedent negotiate the terms for 

each facultative certificate. Facultative reinsurance is commonly 

purchased for large, unusual or catastrophic risks. Reinsurers thus 

must have the necessary resources to underwrite individual risks 

carefully. (“Treaty” reinsurance, discussed further below, involves a 

preexisting commitment by the reinsurer to cover a predetermined 

class and amount of coverage that will be sold by the insurer-cedent.) 

Other uses of facultative reinsurance include: 

1. When an insurer is offered a risk that exceeds its standard 

underwriting or reinsurance limits for that class, facultative 

reinsurance can permit the ceding company to accept the risk. 

2. Insurers can fill gaps in coverage caused by reinsurance treaty 

exclusions by seeking separate facultative coverage for a 

specific policy or group of policies. 

3. A reinsurer can issue facultative reinsurance to participate in a 

market in the short term to minimize risk and take advantage 

of favorable rates. 

4. A treaty reinsurer may purchase facultative reinsurance to 

protect itself and its treaty reinsurers. 

Insurers sometimes purchase both facultative and treaty reinsurance 

to cover the same risk. Unless there are contract terms to the contrary, 

the facultative reinsurance will perform first and completely before 

any of the treaty reinsurance performs. Sometimes the facultative 

reinsurance only applies to the ceding company’s net retention; other 

times facultative coverage also inures to the benefit of the treaty 

reinsurers. Ideally, the wording of the facultative certificate will make 

this clear. As a general matter, whether the facultative reinsurance 

inures to the benefit of the treaty reinsurers will depend on whether 

the treaty reinsurers paid a portion of the premium for the facultative 


Understanding Reinsurance 40.04[1] 

coverage. If not, the facultative reinsurance likely will not inure to the 

treaty reinsurers’ benefit. 

Facultative certificates are often one or two page documents. The 

front of a typical contract identifies the parties, the underlying 

policyholder and policy number reinsured, amounts of the policy 

ceded and retained, the type of reinsurance (proportional or nonproportional) 

and the premium. The back of each certificate usually 

contains the following provisions: notice of loss; net retention; 

coverage for loss adjustment expenses; claims handling; cancellation; 

insolvency; tax; offset and intermediaries. Many facultative certificates 

do not include an arbitration provision [see § 40.22 below for a 

discussion of arbitration clauses in reinsurance agreements]. 

Treaty reinsurance, the most common form of reinsurance, covers 

some portion of a defined class of an insurance company’s business 

(e.g., an insurer’s products liability or property book of business). 

Reinsurance treaties cover all of the risks written by the ceding 

insurer that fall within their terms unless exposures are specifically 

excluded. Thus, in most cases, neither the cedent nor the reinsurer 

has the “faculty” to exclude from a treaty a risk that fits within the 

treaty terms. Therefore, treaty reinsurers rely heavily on the cedent’s 

underwriting. Treaty relationships are often long-term; treaties sometimes 

are renewed automatically unless a change in terms is requested. 

A typical treaty can include thirty or forty articles or clauses 

which describe the class or classes of business covered, the type of 

treaty (proportional or non-proportional), the amount of reinsurance 

provided and details about the parties’ obligations with respect to 

treaty operation. 

� Cross Reference: For a thorough discussion of the distinction 

between facultative and treaty reinsurance, see Compagnie de 

Reassurance D’Ile de France v. New England Reinsurance Corp., 

825 F. Supp. 370 (D. Mass. 1993), aff’d in part and rev’d in part, 57 

F.3d 56 (1st Cir. 1995). 

z Strategic Point: Reinsurance treaties that run consecutively for 

many years can present certain difficulties in terms of claims 

processing. Contracts are often amended by endorsements which 

can add or delete reinsurers, change premium or ceding commission 

rates or add, delete or alter important contract terms. These 

changes may be retroactive to contract inception or have a 

different effective date. Practitioners evaluating indemnity under 

reinsurance treaties must take care to review complete versions of 


40.04[2] New Appleman Insurance Practice Guide 

the wordings, including endorsements and amendments. 

40.04[2] Proportional vs. Non-proportional. Proportional or pro-rata 

reinsurance is characterized by a proportional division of liability 

and premium between the ceding company and the reinsurer. The 

cedent pays the reinsurer a predetermined share of the premium, and 

the reinsurer indemnifies the cedent for a like share of the loss and 

the expense incurred by the cedent in its defense and settlement of 

claims (the “allocated loss adjustment expense” or “LAE”). According 

to the percentage agreed, the cedent and reinsurer share the 

premium and losses from the business reinsured. Proportional reinsurance 

spreads the risk of loss and creates a broad identity of 

interests between the cedent and the reinsurer, which effectively 

co-venture in relationship to their relative shares of the risk, even 

though only the cedent has contractual privity with the direct 

insured. 

The two most common types of proportional reinsurance are “quota 

share” and “surplus share” reinsurance. Under quota share reinsurance, 

the reinsurer assumes an agreed percentage of each risk from 

the first dollar, up to any limit assigned. For example, if there is a $100 

loss under a 40 percent quota share reinsurance contract, the cedent 

would bear $60 of that loss and the reinsurer concurrently would bear 

$40 of that loss. The percentage always reflects the percentage of loss 

borne by the reinsurer. The portion of the risk that the reinsurer 

assumes is called the “ceded risk,” and the portion that the cedent 

keeps is referred to as the reinsurance “retention.” Although it is not 

a partnership, quota share reinsurance presents a greater identity of 

interests between the ceding insurer and the reinsurer than does 

excess of loss reinsurance (discussed below). 

Surplus share is similar to quota share reinsurance in that premiums 

and losses are shared on a proportional basis, but differs in that the 

portion of the reinsured policy the direct insurer retains is expressed 

as a fixed monetary amount, and the reinsurance may or may not 

apply from the first dollar (i.e., the reinsurance may apply only in 

excess of the fixed dollar amount or the cedent and reinsurer may 

together share losses as they are incurred until the cedent incurs an 

amount equal to its overall retention). Premium is shared based on 

the ratio of retained liability, and the reinsurer agrees to pay the same 

pro rata portion of any loss and expense incurred by the cedent. 

Examples: Where the policy limit is $150,000, and the cedent’s 

retention is $25,000, the amount ceded to the reinsurer is $125,000 



and the ratio of what is ceded to what is retained is 5:1. Losses 

therefore will be shared in that proportion. For a loss of $100,000, 

the cedent is responsible for $16,667 and the reinsurer pays five 

times more, or $83,333. 

In addition, in surplus share reinsurance contracts, the proportion of 

premium and liability ceded can vary, at the cedent’s option, from 

risk to risk. Although it can be advantageous for the direct insurer to 

vary the percentage of premium and liability ceded for each risk, 

these variations make a surplus share contract more difficult to 

administer than a simple quota share. 

Under non-proportional or excess of loss reinsurance (sometimes 

referred to as “XL” or “XOL”), the reinsurer’s liability is not triggered 

until the cedent’s losses exceed a specified monetary amount, called 

the “retention.” If losses to the ceding company are less than the 

retention, the reinsurer owes nothing. The reinsurance agreement 

will include a limit of liability for each claim above which the 

reinsurer is not obligated to pay. Excess of loss reinsurance can be 

provided on an individual risk, an occurrence or an aggregate basis, 

and is typically placed in layers. Non-proportional reinsurance tends 

to cost less than does quota share reinsurance because the reinsurer 

does not participate in every loss. However, because the level of risk 

under non-proportional reinsurance depends on the nature of the 

reinsurance undertaking, there is a great deal of uncertainty with this 

coverage. In addition to the underlying risk, reinsurers must consider 

the layer of coverage on which it will participate. 

Whether a potential cedent seeks to obtain or place coverage on a first 

dollar basis versus excess of loss reinsurance depends on several 

factors, including the cedent’s anticipated loss profile. For example, if 

the cedent expects to incur frequent losses at low levels, it may make 

economic sense for the cedent to secure quota share reinsurance, so it 

has some protection for even the smallest losses. In contrast, if the 

cedent expects to have infrequent losses at significant levels or wishes 

to guard against risk of a significant loss, it may choose to purchase 

excess of loss coverage. 

z Strategic Point — Reinsurer: Because non-proportional reinsurance 

is characterized by unpredictability and potentially high 

losses, XOL reinsurers may incur a disproportionate share of total 

losses. This is especially problematic with respect to “long tail” 

lines of insurance where the incidence of loss and determination 

of damages can extend well beyond the period in which the 

insurance or reinsurance is in force. In such cases, premiums may 



be received long before liability is manifested or developed, and 

liability may be difficult to estimate because it is determined by 

the prevailing legal or economic environment in the future. (On 

the other hand, the reinsurer is able to hold on to the premium 

paid by the cedent for a longer period, offering it the opportunity 

to “earn out” losses through investment return.) Examples of 

long-tail lines of insurance include malpractice, products liability, 

and errors and omissions. 

� Cross Reference: For discussion of the advantages and disadvantages 

of proportional and non-proportional reinsurance contracts, 

see Eric Mills Holmes, Appleman on Insurance 2d § 102.3. 

� Cross References: For an example of a reinsuring clause for a 

quota share reinsurance agreement, see § 40.30 below. For an 

example of a reinsuring clause for a surplus share reinsurance 

agreement, see § 40.31 below. For an example of a reinsuring 

clause for an XOL reinsurance agreement, see § 40.32 below. 

40.04[3] Catastrophe Reinsurance. Catastrophe reinsurance is a form 

of excess of loss reinsurance which, subject to a specific limit, 

indemnifies the cedent for the amount of loss in excess of its retention 

with respect to an accumulation of individual losses affecting multiple 

policies resulting from a catastrophic event. Rather than single 

large losses, even an unexpected number of such losses within the 

reinsurance policy term, catastrophe coverage principally provides 

protection for the cedent against the concentration of several losses, 

each of which may stem from different direct insureds but which 

altogether arise from a common event (or closely related series of 

events). The reinsurance contract is typically called a “catastrophe 

cover.” Catastrophe reinsurance can be provided on an aggregate 

basis with coverage for losses over a certain amount for each loss in 

excess of a second amount in the aggregate for all losses in all 

catastrophes occurring during a certain time period (often one year). 

Catastrophe cover is typically secured to protect the cedent against an 

intolerable accumulation of actual loss and to stabilize its underwriting 

experience. 

Another variant of reinsurance purchased by insurers is “clash 

cover,” which requires two or more coverages or policies issued by 

the reinsured to be involved in a loss, for coverage to apply. This 

reinsurance typically attaches above the limits of any one policy. 

Clash covers are often catastrophe covers. 



� Cross Reference: For discussion of the typical terms of catastrophe 

cover, see Eric Mills Holmes, Appleman on Insurance 2d 

§ 102.3[B][2]. 

40.04[4] Finite Reinsurance. There is no generally accepted definition 

of finite risk (sometimes called “financial”) reinsurance. Broadly 

speaking, it is a form of reinsurance that carefully controls and limits 

the amount and type of risk transferred to the reinsurer, but often 

involves the transfer of money, a return premium from the reinsurer, 

to the cedent as a result of how losses developed under the 

reinsurance contract. Finite reinsurance can be distinguished from 

other non-finite or “traditional” types of reinsurance based on the 

extent to which there are limitations on the “underwriting risk,” the 

risk that the amount of losses will exceed premiums. Participants in 

finite risk reinsurance transactions tend to focus primarily on financial 

risks, such as timing risk (the risk that losses will need to be paid 

sooner than expected), investment risk (the risk that the reinsurer will 

earn less investment income than expected on the reinsurance 

premium) and credit risk (the risk that the cedent will not make the 

required premium payments). 

Finite risk reinsurance contracts are typically treaties that are closely 

tailored to meet the particular needs of a cedent. They can be quota 

share or excess of loss treaties and may cover losses that have yet to 

be quantified or to have occurred at all or losses that have already 

occurred in part but where the amount and timing of the loss is still 

uncertain. Finite risk reinsurance contracts often include some or all 

of the following: 

1. A ceiling on the amount of underwriting risk assumed by the 

reinsurer; 

2. An explicit recognition of the time value of money through the 

use of experience accounts funded by large reinsurance premiums, 

which accumulate investment income over time and 

fund the loss payments; 

3. Inclusion of a commutation clause that allows for profit 

sharing between the cedent and reinsurer based on the financial 

results of the reinsurance contract; 

4. Multi-year contracts that allow the cedent to mitigate volatility 

by recognizing a loss gradually, rather than all at once. 

Finite risk transactions are legitimate and widespread, though some 

forms of transactions have been criticized as being in substance 



distinguished loans but which as something other than a loan obtains 

more favorable tax or accounting treatment (until challenged). The 

key issue is how to account for the transaction. If there has been 

sufficient risk transfer, the contract can be accounted for as reinsurance. 

If not, then contract deposit accounting is appropriate. 

t Warning: Significant regulatory attention has recently been 

directed at how insurers account for finite risk reinsurance and 

whether the principal objective of these transactions is untethered 

from an underlying business rationale but instead is designed to 

improve the appearance of the balance sheet of the cedent (and 

thus implicitly, or so the argument goes, to mislead investors and 

regulators as to the true financial condition of the cedent). 

Insurers and reinsurers in the United States and elsewhere have 

been investigated by the SEC, state Attorneys General, state 

Insurance Departments, and other law-enforcement officials with 

jurisdiction. A common element in many of the finite risk 

reinsurance transactions under attack by regulators is an allegation 

that the transactions were presented and accounted for as if 

they genuinely transferred material risk, when in fact the transactions 

did not do so and thus were more in the nature of loans 

or deposits on account. They were instead allegedly intended 

only to achieve a particular result on a company’s balance sheet 

— what is sometimes referred to as “financial engineering” or 

more commonly “smoothing” of earnings. 

Example: Effective in 2006 and 2007, the National Association of 

Insurance Commissioners (“NAIC”) amended the disclosure requirements 

for companies that purchase finite risk reinsurance, 

and the new requirements demand substantial and ongoing 

management attention. The new requirements include several 

new interrogatories (which are part of the “General Interrogatories” 

section of the Annual Statement) that apply to “ceded” 

reinsurance and are intended to identify reinsurance agreements 

that have characteristics of contracts which the regulators have 

identified as prone to abuse and which warrant closer review. For 

example, under Interrogatory 9.1, the reporting company is asked 

to identify any ceded reinsurance which meets three conditions: 

(1) the agreement alters surplus by more than 3% (positive or 

negative) or represents more than 5% of premiums or losses; (2) 

the contract was accounted for as reinsurance and not as a 

deposit; and (3) the contract has one or more of the following 

features “or other features that would have similar results”: 



• non-cancelable contract terms longer than two years; 

• a provision whereby cancellation triggers an obligation by 

the ceding company or an affiliate to enter into a new 

contract with the reinsurer or an affiliate; 

• aggregate stop loss reinsurance coverage; 

• an unconditional or unilateral right by either party to 

commute, unless triggered by a decline in the counterparty’s 

credit status; 

• a provision permitting reporting or payment of losses less 

frequently than quarterly; 

• payment schedule, accumulating retentions from multiple 

years or any features inherently designed to delay timing 

of cedent reimbursement (e.g. experience accounts). 

In the event conditions (1), (2) and (3) are satisfied, the reporting 

company must provide certain supplemental information including: 

(a) a summary of the terms of the responsive contracts; (b) a brief 

discussion of the principal objectives and “economic purpose” for 

entering into the contract; and (c) the aggregate financial statement 

impact of all such contracts on the balance sheet and income 

statement. 

A second interrogatory (9.2) is intended to ferret out additional 

arguably abusive reinsurance arrangements. Here, the reporting 

company must identify any ceded risks (other than to captives or 

under approved pooling arrangements) for which it recorded a 

positive or negative underwriting result greater than 5% of prior 

year-end surplus as regards policyholders or it reported calendar 

year written premium ceded or year-end loss and loss expense 

reserves ceded greater than 5% of prior year-end surplus as regards 

policyholders where: (1) the ceded written premium is 50% or more 

of the entire direct and assumed premium written by the assuming 

reinsurer, based on its most recent financial statement; or (2) twentyfive 

percent or more of the written ceded premium has been 

retroceded back to the ceding company in a separate reinsurance 

contract. Cessions by or to affiliates, including multiple contracts with 

the same reinsurer or its affiliates, are included in determining if the 

conditions are met. If either condition 1 or 2 of this interrogatory is 

met, the reporting company must provide the same supplemental 

information noted above. 

An additional interrogatory (9.4) requires the cedent to identify 



contracts that it has accounted for as reinsurance for statutory 

accounting purposes yet accounted for as a deposit for GAAP 

purposes (or vice versa). For any such contract, an explanation for the 

differing treatment must be provided in a supplemental filing. 

The NAIC also now requires CEOs and CFOs to complete a “Reinsurance 

Attestation Supplement” that is similar to provisions of the 

Sarbanes-Oxley Act (“SOX”), for “all reinsurance contracts for which 

the reporting entity is taking credit on its current financial statement.” 

The attestation includes the following four parts, which share 

in the common objectives to encourage transparency and auditability 

for reinsurance transactions of certain forms and to memorialize, 

preferably concurrent to entry into the reinsurance contract in 

question, the underlying business rationale and purpose for the 

transaction as a safeguard against market participants coopering up 

paper with or without oral side deals that negate the apparently 

legitimate business objective of the paperwork. 

Consider: Note that this regulatory purpose is not to preclude 

participants from making ill-considered, underpriced, or even 

foolish deals — shareholders may have other recourse for such 

non- or misfeasance; instead, preservation of the integrity of the 

largely self-reported financial and insurance regulatory systems is 

meant to be buttressed through these disclosure requirements. 

1. No side agreements exist, written or oral, that would “under 

any circumstances reduce, limit, mitigate or otherwise affect 

any actual or potential loss to the parties.” This prong of the 

attestation applies to every reinsurance contract, and not just 

to those that may be characterized as “finite” in nature or 

appearance. Verifying the absence of all such oral and written 

arrangements as to all contracts will likely require both 

documentary review and interviews of underwriting personnel, 

perhaps even including prior employees. Companies and 

their auditors should develop a plan for accomplishing this 

review and documenting its methodology and results. 

2. For reinsurance contracts entered into, renewed or amended 

after January 1, 1994, for which risk transfer is not reasonably 

considered to be self-evident, there is documentation evidencing 

proper accounting treatment under SSAP 62. Because 

Statement of Standard Accounting Practice (“SSAP”) 62 and 

Financial Accounting Standards Board (“FASB”) 113 (related to 

GAAP and statutory reinsurance accounting and risk transfer) 

did not apply until 1994, the NAIC recognizes that risk transfer 



analysis may not have been memorialized contemporaneously. 

In terms of which contracts have reasonably self-evident risk 

transfer, the ceding company may want to look back to the 

Interrogatories. Certainly, any contract reportable under the 

conditions delineated will be subject to this prong of the 

attestation. Companies will want to obtain guidance from 

counsel and auditors as to what constitutes sufficient “risk 

transfer analysis” in today’s environment. 

3. The reporting entity complies with all requirements of SSAP 

62. This deceptively simple sounding prong will require the 

careful exercise of “due diligence.” Each company will determine, 

perhaps based on consultation with accountants, lawyers 

and independent auditors, what constitutes sufficient due 

diligence to establish compliance with all of the risk transfer 

and accounting requirements of SSAP 62. 

4. The reporting entity has appropriate controls in place to 

monitor the use of reinsurance and adhere to the provisions of 

SSAP 62. This prong is the key to the ability to make the 

CEO/CFO attestations on an ongoing basis. Some companies 

will have sufficient controls already in place; others will need 

to develop such controls and put them in place as soon as 

possible. 

40.04[5] Fronting Arrangements. There is not a general agreement in 

the reinsurance industry as to how fronting is defined, and there are 

varying perceptions of whether the general duties and relationships 

between cedent and reinsurer change in the context of a “fronting” 

arrangement. At a minimum, fronting involves the reinsurance of all 

or substantially all of a book of business. The ceding company retains 

little or no net liability on the ceded business and receives a fee 

(through the ceding commission and perhaps other forms of compensation 

such as service fees) in exchange for allowing the business 

to be written on its paper. Sometimes, the goal of a fronted arrangement 

is to have the insurance that is sought to be brought to the 

marketplace sold through the auspices of an “admitted” carrier, even 

though the real party in interest — with underwriting expertise and 

per the reinsurance contract financial exposure vis-a-vis the cedent/ 

front — is the reinsurer. In many fronting arrangements, a managing 

general agency (“MGA”) underwrites the business and handles 

claims on the reinsured policies. There is disagreement as to what 

extent responsibility for monitoring the MGA and responsibility for 

the MGA’s misdeeds lies with cedent or reinsurer. It is clear, however, 



that a fronting insurer remains contractually liable to perform with 

respect to its insureds under the direct policies, whether or not it is 

indemnified by its reinsurer [Am. Special Risk Ins. Co. v. Delta Am. 

Re-Insurance Co., 836 F. Supp. 183, 185 (S.D.N.Y. 1993)]. The reinsurer, 

lacking privity with the direct insured, may be exposed to 

claims of tortious interference with contract or for prospective 

economic advantage if it directs the cedent/front not to pay a valid 

claim. At the same time, the cedent faces the risk that if it pays the 

direct claim without the support of its reinsurer a risk that it thought 

it may be only fronting may remain on its doorstep, for the reinsurer 

may assert that the payment to the direct insured was never owed in 

the first place under the direct insurance policy and thus represents 

an uncovered, ex gratia or gratuitous payment for which indemnification 

under the reinsurance arrangement is not owed. 

z Strategic Point: The reinsurance contract in a fronting arrangement 

should optimally specify who is responsible for oversight of 

the MGA and who is responsible if the MGA breaches its duties. 

Consider: Parties should confirm that fronting is allowed in their 

jurisdiction, and that there are no specific regulations that are 

relevant to their arrangements. 

z Strategic Point: Fronting arrangements enable reinsurers to 

accept 100 percent of the liability in states where they are not 

licensed to write such business on a direct basis [Reliance Ins. Co. 

v. Shriver, 224 F.3d 641, 642 (7th Cir. 2000); Union Sav. Am. Life 

Ins. Co. v. N. Central Life Ins. Co., 813 F. Supp. 481, 484 (S.D. Miss. 

1993); Equity Diamond Brokers, Inc. v. Transnational Ins. Co., 785 

N.E.2d 816, 818 (Ohio Ct. App. 2003)]. In some instances, fronting 

allows alien insurers to accept 100 percent of the exposure on 

risks it is prohibited by regulatory restrictions to write directly 

[Gallinger v. Vaaler Ins., 12 F.3d 127, 128 n.1 (8th Cir. 1994) 

(applying North Dakota law)]. It should be noted that fronting 

can be done as a retrocession also. Fronting allows ceding 

insurers to receive reinsurance credit that would not be available, 

at least without security, if the reinsurance was issued directly by 

an unauthorized reinsurer [see § 40.06 below for a discussion of 

credit for reinsurance]. A licensed reinsurer can front for an 

unauthorized reinsurer or a reinsurance syndicate, to permit the 

ceding insurer to take credit for the reinsurance without need for 

security [Am. Special Risk Ins. Co. v. Delta Am. Re-Insurance Co., 

836 F. Supp. 183, 185 (S.D.N.Y. 1993)]. 


40.05 Lack of Privity of Contracts. 


40.05[1] Know General Rule. A fundamental principle of reinsurance 

is that the reinsurer ordinarily is not liable to the original policyholder 

of the ceding insurer; it is not a co-signer of the policy issued 

to the original policyholder, and it is not jointly and severally 

obligated to make good on the benefits the policyholder sought to 

obtain under the insurance contract sold by the insurer/cedent. 

Many court decisions have recognized that the reinsurer is in 

contractual privity only with the ceding company and has no 

contractual obligation to the original insured, underlying claimants, 

or any third parties [Barhan v. Ry-Ron, Inc., 121 F.3d 198 (5th Cir. 

1997) (applying Texas law); Travelers Cas. & Sur. Co. v. Prudential 

Reinsurance Corp., 2001 U.S. Dist. LEXIS 10913 (N.D. Ohio 2001), 

citing Stickel v. Excess Ins. Co. of Am., 23 N.E.2d 839 (Ohio 1939); 

Prudential Reinsurance Co. v. Superior Court (Garamendi), 842 P.2d 

48 (Cal. 1992)]. Moreover, most courts have rejected claims brought 

by original policyholders against reinsurers based on agency and 

third-party beneficiary theories [Aetna Ins. Co. v. Glens Falls Ins. Co., 

453 F.2d 687, 690 (5th Cir. 1972) (applying Georgia law); Reid v. 

Ruffin, 469 A.2d 1030 (Pa. 1983)]. 

Exception: While the rule of lack of privity is generally respsected 

by the courts, there have been some cases, particularly arising out 

of the insolvency of the direct insurer/cedent, where a court has 

characterized the original policyholder as a third-party beneficiary 

of the reinsurance arrangement, thus possessing the rights 

to enforce a contract to which it is not a party in accordance with 

the ordinary contract-law rules governing third-party beneficiaries. 

Policyholders may seek to skip over the insurer with which 

it has privity by arguing that the reinsurer is the alter ego of the 

insurer, at least insofar as the particular policy or particular 

insurance program is concerned. For example, in the bankruptcy 

context, reinsurers were considered to be the true risk bearers 

where the ceding insurer merely acted as the fronting company, 

bore no underwriting risk, and left responsibility for claims 

handling and funding to the reinsurers [Koken v. Legion Ins. Co., 

831 A.2d 1196, 1237-38 (Pa. Commw. Ct. 2003)]. In another case, 

the court found that an insured had third-party beneficiary status 

where the insurer acted as a fronting company and the reinsurers 

bore all responsibility for underwriting and claims handling and 

managed the defense of coverage claims [Venetsanos v. Zucker, 

Facher & Zucker, 638 A.2d 1333, 1339-40 (N.J. Super. Ct. App. Div. 



1994)]. [See § 40.04[5] above for a discussion of fronting arrangements]. 

However a federal district court in Missouri rejected the 

theory that a reinsurer’s conduct in paying claims alone can make 

the reinsurer liable directly to the original insured [Allendale 

Mut. Ins. Co. v. Crist, 731 F. Supp. 928, 932-33 (W.D. Mo. 1989)]. 

Similarly, a federal district court in New Jersey rejected the 

policyholders’ assertion that a reinsurer’s involvement in the 

“adjustment and settlement of claims” (as is common where there 

is a claims-control clause) allowed the court to “pierce the alleged 

reinsurance veil” [G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. 

Dist. LEXIS 19060, at *40-41 (D.N.J. 2007)]. 

Exception: It may be possible for an insured to bring a direct 

action against a reinsurer if the reinsurer allegedly induced the 

direct insurer to breach the underlying policy by denying the 

claims in question. For example, a tort claim based on this theory 

asserted by policyholders against a reinsurer recently survived a 

motion to dismiss in a federal district court in Florida [Law 

Offices of David J. Stern v. SCOR Reinsurance Corp., 354 F. Supp. 

2d 1338, 1341-42 (S.D. Fla. 2005)]. 

� Cross Reference: For a general discussion of a reinsurer’s 

potential liability to the policyholder of the ceding insurer, see Eric 

Mills Holmes, Appleman on Insurance 2d § 106.7. 

40.05[2] Consider Cut-Throughs. A significant exception to the general 

rule that an insured may not seek payment directly from a 

reinsurer is present where a cut-through endorsement is contained in 

the original underlying policy. A cut-through provision gives an 

insured a contractual right to pursue a direct action against the 

reinsurer; it can be conceived of as an express grant of third-party 

beneficiary status of the putative non-party direct insured. Cutthroughs 

most often apply only when the direct insurer is insolvent 

and provide that the loss which the reinsurer would have paid to the 

estate of the insolvent insurer is instead paid directly to the original 

policyholder [compare Wilcox v. Anchor Wate, 2006 UT 6]. A cutthrough 

is similar to an “assumption reinsurance” arrangement, 

which effectively is the consensual substitution of the reinsurer for 

the cedent as the agent for performance, which in turn typically vests 

in the direct insured the right to pursue either the original direct 

insurer (with which it has contract privity) or the assumer of the 

direct insurer’s liability, at the insured’s election. One difference 

between a cut through and an assumption arrangement, is that cut 



throughs more often are agreed ex ante, that is, when the policy is 

placed, and assumptions occur when the cedent effects a lossportfolio 

transfer to a reinsurer by which the reinsurer steps into its 

shoes inter sese. The assumption must be an explicit written assumption 

of liability to the original policyholder who acquires a direct 

right of action against the reinsurer; note that since the assumption 

takes place on only one side of the transaction, it is not a “novation,” 

freeing the original contracting party from its contractual duties; it is 

not fictive, however, which is why the direct insured often will be 

permitted to elect to pursue either the original party in privity or the 

assumption reinsurer. Many state statutes permit reinsurers to enter 

into cut-through endorsements. [Cal. Ins. Code § 922.2; N.Y. Ins. 

Code § 1308(a)(2)(B); Tex. Ins. Code § 493.055]. This right has been 

recognized by many courts as well [Martin Ins. Agency, Inc. v. 

Prudential Reinsurance Co., 910 F.2d 252-53 (5th Cir. 1990) (interpreting 

Louisiana law); Bruckner-Mitchell, Inc. v. Sun Indem. Co., 82 F.2d 

434, 444 (D.C. Cir. 1936); Klockner Stadler Hurter, Ltd. v. Ins. Co. of 

Pennsylvania, 785 F. Supp. 1130, 1134 (S.D.N.Y. 1990)]. 

Exception: Cut-through endorsements that interfered with administration 

of an insolvent insurer’s estate were found to be 

unenforceable [Colonial Penn Ins. Co. v. Am. Centennial Ins. Co., 

1992 U.S. Dist. LEXIS 17552, at *15-18 (S.D.N.Y. 1992), discussing 

Foster v. Mutual Fire, Marine & Inland Ins. Co., 531 Pa. 598, 614 

(1992)]. 

t Warning: Cut-through endorsements are unenforceable under 

Bermuda law [Dunlop Pneumatic Tire Company Ltd. v. Selfridge 

& Co. Ltd. [1915] A.C. 847]. Insurers and reinsurers should 

carefully research the legality and enforceability of cut-through 

clauses before using them. 

� Cross Reference: For a discussion of cut-through endorsements 

and related contract provisions, see Eric Mills Holmes, Appleman 

on Insurance 2d § 167.2[B][1]. 


III. CONSIDERING REINSURANCE REGULATION. 

40.06 Credit for Reinsurance. Credit for reinsurance laws constitute a key 

component of the regulation of reinsurance in the United States. These 

laws determine the circumstances in which a ceding insurer can take 

financial statement credit for reinsurance recoverables as an asset and as a 

reduction of its unearned premium and loss reserves on account of 

reinsurance ceded. Where an insurer can take credit for reinsurance, it can 

increase its “surplus” and thus expand its allowed capacity to write new 

insurance business. In order to qualify for financial statement credit, most 

states require that the reinsurer be licensed or accredited in the same state 

where the direct insurer does business, or that the reinsurer be domiciled 

and licensed in a state that employs substantially similar credit for 

reinsurance standards to those imposed by the direct insurer’s state of 

domicile. Most states also allow credit for reinsurance ceded to a non- 

United States reinsurer that maintains a trust fund in the U.S. for the 

protection of its U.S. ceding insurers. In addition, the reinsurance contract 

must actually materially transfer risk from the cedent to the reinsurer and 

include an insolvency clause [see § 40.08 below for a discussion of the 

insolvency clause]. Some states also require that the reinsurer assume all 

credit risks of any intermediary receiving payments [N.Y. Comp. Codes R. 

& Regs. tit. 11, § 125.6]. 

Exception: A significant portion of the reinsurance in the U.S. is ceded 

to unlicensed alien reinsurers that are not regulated for solvency in any 

state. A ceding insurer can still take credit for reinsurance ceded to 

unlicensed or unaccredited reinsurers if the recoverables are adequately 

collateralized. This requirement is satisfied if the reinsurer 

maintains certain trust deposits for the protection of all of its U.S. 

cedents. Alternatively, the reinsurer can provide individual cedents 

with collateral. The ceding company can reduce its balance sheet 

liabilities by an amount equal to the collateralization. Ceding insurers 

typically secure the payment of reserves on reinsured liabilities (i.e., 

case reserves, incurred but not reported reserves (“IBNR”), unearned 

premium reserve and reserve for allocated loss adjustment expenses 

(“LAE”)) by means of a clean letter of credit issued or confirmed by a 

financial institution approved by the state insurance commissioner [see 

§ 40.06 below for a discussion of letters of credit]. In these circumstances, 

the reinsurer is the applicant requesting the bank to issue the 

letter of credit in favor of the beneficiary, the ceding insurer. Trust 

funds, reinsurer funds held by the cedent as security (“funds 

withheld”) or other approved mechanisms also may be viewed as 



collateral sufficient to permit credit for reinsurance [N.Y. Comp. Codes 

R. & Regs. tit. 11, § 126.3]. Many of these rules, however, are currently 

under review by the National Association of Insurance Commissioners 

(“NAIC”) and the federal government. 

Example: The NAIC develops model laws, regulations and financial 

statements in order to achieve substantial similarity of state laws and 

procedures in key areas of solvency, including credit for reinsurance. 

The NAIC has issued a recommended credit for reinsurance model 

law and regulation, some variation of which has been promulgated by 

every state [Model Law on Credit for Reinsurance (2003) and Model 

Regulation on Credit for Reinsurance reprinted in Eric Mills Holmes, 

Appleman on Insurance 2d]. 

Example: The State of California recently adopted a comprehensive set 

of regulations, referred to as the “Reinsurance Oversight Regulations,” 

which cover the following three general topics: (1) the ceding company’s 

accounting for reinsurance on its financial statements; (2) requirements 

applicable to the form and content of reinsurance agreements; 

and (3) oversight of reinsurance transactions and related sanctions. 

The requirements are intended “to elicit from insurers a true exhibit of 

their financial condition and to safeguard the solvency of licensees” 

and apply to all insurers licensed or accredited in California, all 

approved U.S. trusts of otherwise unauthorized reinsurers and licensed 

reinsurance intermediaries. In addition, reinsurers that are not 

licensed in California but assume risks from California domestic and 

foreign insurers may also be affected by changes in the regulations 

with respect to approved forms of security securing reinsurance 

obligations. The regulations contain detailed requirements for licensed 

insurers intending to receive credit for reinsurance on their financial 

statements, requirements for risk transfer and requisites for reinsurance 

arrangements, including, specifically: 

• Credit for reinsurance ceded to admitted insurers and accredited 

reinsurers; 

• Credit for reinsurance secured by an approved U.S. trust; 

• Credit for reinsurance required by law; 

• Credit for reinsurance secured by a single beneficiary trust, a 

letter of credit, or funds withheld; 

• Credit for reinsurance of foreign insurers; 

• Transfer of risk for both life and disability and property and 

casualty business; 



• Contract requirements for statement credit; and 

• Requirements regarding the form of reinsurance arrangements 

[Cal. Code Regs. tit. 10, §§ 2303-2303.25]. 

Example: New York similarly provides credit for reinsurance as 

follows: 

“§ 1301. Admitted assets 

(a) In determining the financial condition of a domestic or foreign 

insurer or the United States branch of an alien insurer for the purposes 

of this chapter, there may be allowed as admitted assets of such insurer, 

unless otherwise specifically provided in this chapter, only the following 

assets owned by such insurer: 

* * * 

(14) Reinsurance recoverable by a ceding insurer: (i) from an insurer 

authorized to transact such business in this state, except from a captive 

insurance company licensed pursuant to the provisions of article seventy of 

this chapter, in the full amount thereof; (ii) from an accredited reinsurer . . . 

to the extent allowed by the superintendent on the basis of the insurer’s 

compliance with the conditions of any applicable regulation; or (iii) from an 

insurer not so authorized or accredited or from a captive insurance company 

licensed pursuant to the provisions of article seventy of this chapter, in an 

amount not exceeding the liabilities carried by the ceding insurer for 

amounts withheld under a reinsurance treaty with such unauthorized insurer 

or captive insurance company licensed pursuant to the provisions of article 

seventy of this chapter as security for the payment of obligations thereunder 

if such funds are held subject to withdrawal by, and under the control of, the 

ceding insurer” [N.Y. Ins. Law § 1301]. 

� Cross Reference: For an example of an unauthorized reinsurance 

clause applying to reinsurance ceded to an unauthorized reinsurer, see 

§ 40.33 below. 

40.07 Letters of Credit. Sometimes, reinsurance contracts require licensed 

reinsurers to post letters of credit. However, letters of credit are more 

commonly obtained by ceding companies which place reinsurance with 

non-admitted reinsurers and wish to take credit for reinsurance on their 

financial statements [see § 40.06 above for a discussion of letters of credit 

as security under credit for reinsurance laws]. The “Asset or Reduction 

from Liability” section of the NAIC’s Model Law on Credit for Reinsurance, 

adopted in the same or an equivalent form by most states, sets forth 

the requirements for collateralization of recoverables from non-admitted 

reinsurers. The NAIC provision stipulates that letters of credit securing the 



payment of reinsurance obligations must be issued or confirmed by a 

qualified U.S. financial institution and be clean, irrevocable, unconditional 

and “evergreen,” requiring the financial institution to provide notice prior 

to expiration [Model Law on Credit for Reinsurance, Section 23 (2003)]. 

The NAIC Model Letter of Credit regulations further provide that letters 

of credit must not be subject to side agreements and must stipulate that the 

beneficiary need only draw a sight draft under the letter of credit and 

present it to obtain funds and need not present any other document 

[Credit for Reinsurance Model Regulation, Section 11A (July 2003)]. 

z Strategic Point — Cedent: Ceding insurers should make sure that 

letters of credit comply with statutory requirements so they can 

properly take credit for reinsurance. 

Example: Regulation 133 issued by the New York State Insurance 

Department sets forth conditions for letters of credit which may be 

treated as an asset by a ceding insurer. Among other things, an 

acceptable letter of credit must: be irrevocable; be clean and unconditional; 

be issued, presentable and payable at an office of the qualified 

bank in the U.S.; contain a statement that identifies the beneficiary; 

contain a statement that it is not subject to any agreement, condition or 

qualification outside of the letter of credit; contain a statement to the 

effect that the obligation of the issuing bank under the letter of credit 

is an individual obligation of such bank and is in no way contingent 

upon reimbursement with respect thereto; contain an issue date and a 

date of expiration; have a term of at least one year and contain an 

evergreen clause which provides at least 30 days’ written notice to the 

beneficiary prior to expiry date for nonrenewal; and state that it is 

subject to and governed by New York law [N.Y. Comp. Codes R. & 

Regs. tit. 11, § 79.2]. 

40.08 Insolvency Clause. In most states, a rehabilitator or liquidator under 

the direction of the domiciliary state’s insurance department takes control 

of an insurance company that is determined to be insolvent. Although 

reinsurance agreements are indemnity contracts, they usually include an 

insolvency clause which alters the indemnity nature of the contract when 

the ceding insurer becomes insolvent. The insolvency clause permits a 

liquidator to collect from the reinsurer the amount of reinsurance proceeds 

that would have become due if the ceding insurer had not become 

insolvent, even if the cedent has not paid its original policyholders. The 

liquidator of the estate assumes the insurer’s rights and obligations under 

the reinsurance agreement, including the reporting, settlement and de- 



fense of claims, and can promptly discharge the insolvent insurer’s 

obligations to claimants. 

Most states have encouraged the inclusion of insolvency clauses by 

enacting legislation providing that the original insurer may not take credit 

for reinsurance on its financial statement unless the reinsurance contract 

contains an insolvency provision [Cal. Ins. Code § 922.2; N.Y. Ins. Law 

§ 1308[a][2]; Mass. Ann. Laws ch. 175, § 20A]. This is a significant 

incentive, as one of the primary reasons for obtaining reinsurance is 

defeated if the cedent is forced to maintain reserves for the full amount of 

reinsurance ceded [see § 40.06 above which discusses the advantages of 

obtaining credit for reinsurance]. As a result, these statutes have had the 

effect of ensuring that virtually all reinsurance agreements issued to U.S. 

cedents include an insolvency clause. 

z Strategic Point — Cedents: Cedents should ensure that the insolvency 

clause meets the requirements of the insurance department of 

their domiciliary state. There are generally five key provisions included 

in the insolvency clause: (1) there is no diminution of the claims 

paid by virtue of the cedent’s insolvency; (2) the liquidator must 

provide notice of the pendency of a claim; (3) the reinsurer has the 

right to investigate and defend claims; (4) the expenses incurred by the 

reinsurer in defense of claims may be reimbursable; and (5) the 

reinsurance proceeds are payable to the liquidator with statutory 

exceptions (i.e. cut-throughs) [Robert C. Reinarz, et al., Reinsurance 

Practices, Vol. I, 67-68 (1st ed. 1990)]. 

� Cross Reference: For an example of a standard insolvency clause, see 

Business Insurance Law and Practice Guide § 14.08[3]; see also § 40.34 

below. 

z Strategic Point — Reinsurer: There can be a tension between the 

liquidator’s interests and those of the insolvent company’s reinsurers; 

if the liquidator agrees to pay a direct insurance claim, it can collect 

reinsurance on the claim even if the estate does not have sufficient 

assets to pay the claim, in whole or in part [see Robert W. Hammesfahr 

and Scott W. Wright, The Law of Reinsurance Claims 254 (1992)]. 

Therefore, reinsurers often monitor liquidators to ensure that they 

handle claims properly until a full settlement is concluded. Many state 

statutes provide that the insolvency clause may permit the reinsurer to 

investigate claims against the insolvent ceding company and interpose 

any defense or defenses which it may deem to be available to the 

ceding company or its liquidator, receiver or statutory successor in the 

proceeding where the claim is adjudicated [N.Y. Ins. Law § 1308(a)(3); 



Cal. Ins. Code § 922.2(a)(2)]. Reinsurers should ensure that their 

insolvency clauses include this wording. 

z Strategic Point — Reinsurer: Many reinsurance contracts include an 

offset clause providing for net accounting between the parties [see 

§ 40.35 for an example of a typical offset clause]. In addition, a 

reinsurer may have a statutory or common law right of set-off (or 

offset) against amounts owed to an insolvent insurer’s estate for any 

amounts that the insolvent insurer owed to the reinsurer. In the event 

of the cedent’s insolvency, an offset clause protects the reinsurer by 

allowing it to reduce the sum that would otherwise be payable to the 

insolvent estate by the amount it is owed. In the absence of a right of 

offset, the reinsurer would be forced to pay claims in full, and it would 

possess an independent claim for any premiums or other sums owed 

by the cedent (which might be paid at only a fraction of the amount 

due given that the cedent is insolvent). Several state insurance statutes 

expressly permit set-offs when the insolvent insurer owed the debt 

before the date of liquidation and the debts and credits are considered 

mutual [Cal. Ins. Code § 1031; Fla. Stat. Ann. § 631.281; N.Y. Ins. Law 

§ 7427]. Several courts have held that inclusion of a statutory insolvency 

clause in the reinsurance contract does not destroy the reinsurer’s 

right to set-off [Comm’r of Ins. v. Munich Am. Reinsurance Co., 

706 N.E.2d 694, 697 (Mass. 1999); Prudential Reinsurance Co. v. 

Superior Court, 842 P.2d 48, 63-64 (Cal. 1992); In re Midland Insurance 

Co., 590 N.E.2d 1186, 1192 (N.Y. 1992)]. However, at least one court has 

found that the insolvency clause’s directive that reinsurance be 

payable without “diminution due to the insolvency of the ceding 

insurer” abrogates the reinsurer’s right to offset unpaid premiums 

from sums due under the insurer’s policies [Bluewater Ins., Ltd. v. 

Balzano, 823 P.2d 1365, 1371-74 (Colo. 1992)]. Another court has 

determined that allowing a reinsurer to set-off unpaid premiums 

against sums owed the insolvent insurer under the reinsurance 

agreement would conflict with the priority of claims established by 

state statute and thus, in effect, is a disguished preference in favor of 

one creditor (the reinsurer) [Allendale Mut. Ins. Co. v. Melahn, 773 F. 

Supp. 1283, 1287-88 (W.D. Mo. 1991) (applying Missouri law)]. 

t Warning: Reinsurers of insolvent companies must take care to pay 

claims to the appropriate party; they are generally obligated to pay the 

liquidator administering the insolvent company’s estate, who is 

deemed the “statutory successor” to the insolvent insurer [Martin Ins. 

Agency, Inc. v. Prudential Reinsurance Co., 910 F.2d 249 (5th Cir. 1990) 

(applying Missouri law); Excess & Cas. Reinsurance Ass’n v. Ins. 



Comm’r of Cal., 656 F.2d 491 (9th Cir. 1982) (applying California law); 

Skandia Am. Reinsurance Corp. v. Schneck, 441 F. Supp. 715 (S.D.N.Y. 

1977) (applying New York law)]. 

Exception: A significant exception to the general rule that the reinsurer 

must pay an insolvent cedent’s liquidator occurs when the reinsurance 

contract contains a cut-through endorsement, [see § 40.05[2] above for 

a discussion of the operation of cut-throughs]. 


IV. CONSIDERING INSURER’S OBLIGATIONS TO REINSURERS IN 

CASE OF CLAIM. 

40.09 Consider Insurer’s Notice Obligations. 

40.09[1] Know What Notice Clause Requires. Most reinsurance contracts 

include a provision requiring the ceding insurer to notify the 

reinsurer of losses or claims that may require the reinsurer to 

indemnify the cedent. Notice provisions typically include information 

sufficient to: 

1. Apprise the reinsurer of potential liabilities to enable it to set 

reserves; 

2. Enable the reinsurer to associate in the defense and control of 

underlying claims; and 

3. Assist the reinsurer in determining whether and at what price 

to renew reinsurance coverage [Unigard Sec. Ins. Co. v. N. 

River Ins. Co., 4 F.3d 1049, 1065 (2d Cir. 1993), reh’g denied, 4 

Mealey’s Reins. Rep., No. 15, at 7 (1993), aff’d in part and rev’d 

in part, 762 F. Supp. 566 (S.D.N.Y. 1991)]. 

Consider: As a practical matter, the cedent should be mindful of 

the need of the reinsurer to provide notice in turn to its retrocessionaires. 

Notice requirements may differ with respect to proportional and 

non-proportional reinsurance. Proportional contracts sometimes do 

not require individual notice of losses, but instead obligate the ceding 

insurer to report losses paid and premiums received on a quarterly or 

monthly basis, so that accounts between the parties can be settled. 

Non-proportional contracts generally include wording requiring 

timely notice of individual claims. The wording used to convey this 

requirement varies but usually conveys the need to give notice 

promptly, immediately or as soon as reasonably possible or practicable. 

In many reinsurance disputes, industry custom and practice 

are often reviewed to determine whether notice was timely. Ceding 

insurers should establish standards and procedures to ensure that 

notice is given to reinsurers in a timely fashion. 

Notice clauses also incorporate varying standards for the event or 

occurrence which triggers the requirement to give notice of a loss or 

claim. Some of the wording frequently used is as follows: 

• any event or development which, in the judgment of the 



reinsured, might result in a claim . . . hereunder 

• any occurrence or accident which appears likely to involve 

this reinsurance 

• any accident in which the reinsurance is or may probably be 

involved 

• all losses which, in the opinion of the Company, may result in 

a claim hereunder 

• any occurrence likely to give rise to a claim hereunder; and 

• in the event of an accident, disaster, casualty or occurrence 

occurring which either results in or appears to be of a serious 

nature as probably to result in a loss involving this Agreement. 

Other notice clauses include specific or objective standards mandating 

notice, such as when the cedent’s reserve exceeds a certain 

percentage or when particular types of injuries occur. Some notice 

clauses require the cedent to inform the reinsurer of significant 

developments that arise after initial notice of a claim has been 

provided. [For an example of a notice clause requiring notice of 

subsequent developments, see § 40.36 below.] 

The notice clause sometimes is part of a reports and remittances 

clause or is included in the “conditions” section of the reinsurance 

contract (though the obligation to provide notice may be considered 

to be a covenant rather than a genuine condition of the reinsurer’s 

performance). 

� Cross Reference: One of the primary purposes of the notice 

clause is to permit reinsurers to determine whether it is necessary 

to take action to protect their interests. Many reinsurance contracts 

include wording permitting the reinsurer to associate in the 

defense of a claim. The claims cooperation wording can be 

included in the notice clause or as a separate provision [see § 40.11 

below for a discussion of claims control and right to associate 

clauses; see § 40.37 below for an example of a notice clause 

incorporating the right to associate with the ceding insurer in the 

defense of claims]. 

� Cross Reference: For a discussion of the notice requirement in 

reinsurance agreements covering environmental business, see 

Mitchell L. Lathrop, Insurance Coverage for Environmental 

Claims, § 10.06[1]. 

40.09[2] Reinsurer’s Assertion of Late Notice As Defense to Payment 

of Its Reinsurance Obligations. 


Understanding Reinsurance 40.09[2][b] 

40.09[2][a] Jurisdictions Requiring Proof of Prejudice. Most courts 

have held that a reinsurer may refuse to perform on the basis of 

“late” notice only if it shows that it was prejudiced by late notice 

of a claim [British Ins. Co. of Cayman v. Safety Nat’l Cas., 335 F.3d 

205, 207 (3d Cir. 2003) (interpreting New Jersey law); Zenith Ins. 

Co. v. Employers Ins. Co. of Wausau, 141 F.3d 300, 307 (7th Cir. 

1998) (applying Wisconsin law); Ins. Co. of Pa. v. Associated Int’l 

Ins. Co., 922 F.2d 516, 523-24 (9th Cir. 1991) (applying California 

law)]. The particular nuances of late-notice law varies from state to 

state. In North Carolina, for example, the reinsurer is required to 

prove prejudice only if the cedent first has demonstrated that its 

failure to give notice was in good faith [Fortress Re, Inc. v. Central 

Nat’l Ins. Co. of Omaha, 766 F.2d 163, 165-67 (4th Cir. 1985) 

(applying North Carolina law)]. In Pennsylvania, the reinsurer 

must show that it was “unduly” prejudiced by untimely notice of 

loss [Life & Health Ins. Co. of Am. v. Fed. Ins. Co. & Great Nat’l Ins. 

Co., 1993 U.S. Dist. LEXIS 12165, at *4 (E.D. Pa. 1993) (applying 

Pennsylvania law)]. In Connecticut, the cedent has the burden of 

showing that the reinsurer suffered no prejudice [Travelers Ins. v. 

Central Nat’l Ins. Co. of Omaha, 733 F. Supp. 522, 528 (D. Conn. 

1990) (applying Connecticut law)]. 

Exception: In some jurisdictions, late notice may entitle the 

reinsurer to relief without a showing of prejudice if the cedent 

acted in bad faith, i.e., was grossly negligent or reckless in 

failing to provide notice [Unigard Sec. Ins. Co. v. North River 

Ins. Co., 4 F.3d 1049, 1069-70 (2d Cir. 1993) (applying New York 

law); Fortress Re Inc. v. Central Nat’l Ins. Co., 766 F.2d 163, 

165-66 (4th Cir. 1985) (applying North Carolina law); Certain 

Underwriters at Lloyd’s London v. Home Ins. Co., 783 A.2d 

238, 240 (N.H. 2001)]. 

z Strategic Point — Cedent: In some jurisdictions, a reinsurer 

may waive its defense of late notice if it fails to object promptly 

and specifically [Cal. Ins. Code § 554; Nat’l Am. Ins. Co. v. 

Certain Underwriters at Lloyd’s London, 93 F.3d 529, 538 (9th 

Cir. 1996); Michigan Twp. Participating Plan v. Fed. Ins. Co., 

292 N.W.2d 760, 767 (Mich. Ct. App. 1999)]. 

40.09[2][b] Jurisdictions Recognizing Late Notice As Defense Regardless 

of Ability to Prove Prejudice. Some courts have determined 

that breach of a notice provision is a complete bar to recovery, 

without a showing of prejudice [Liberty Mut. Ins. Co. v. Gibbs, 773 



F.2d 15, 18-19 (1st Cir. 1985) (applying Massachusetts law); Allstate 

Ins. Co. v. Employers Reinsurance Corp., 441 F. Supp. 2d 865, 875 

(N.D. Ill. 2005), citing INA Ins. Co. of Ill. v. City of Chi., 379 N.E.2d 

34, 36 (Ill. App. Ct. 1978) (applying Illinois law); Highlands Ins. Co. 

v. Employers’ Surplus Lines Ins. Co., 497 F. Supp. 169, 171-73 (E.D. 

La. 1980) (applying Texas law)]. These cases thus construe the 

notice provision as a condition precedent to performance. 

Exception: The Ninth Circuit has stated that, even where notice 

is denominated a condition precedent, the reinsurer still must 

demonstrate prejudice to be relieved of liability [Nat’l Am. Ins. 

Co. v. Certain Underwriters at Lloyd’s London, 93 F.3d 529, 539 

(9th Cir. 1996) (applying California law)]. 

� Cross Reference: For a discussion of reinsurance cases considering 

late notice defenses and what constitutes prejudice to 

a reinsurer from late notice, see Eric Mills Holmes, Appleman 

on Insurance 2d § 105.7. 

40.10 Consider Reinsurer’s Right to Access Insurer’s Records. 

40.10[1] Consider What Access to Records Clause Requires to Be Made 

Available to Reinsurer. Most reinsurance contracts include a provision 

granting the reinsurer the right to inspect or audit the ceding 

insurer’s books and records. This clause might be called “Access to 

Records,” “Inspection of Records” or simply “Audit.” The right to 

audit or inspect is important to the reinsurer, as the nature of 

reinsurance dictates that the cedent maintain all of the information 

about the business written and the claims made. The inspection 

clause allows the reinsurer to evaluate the performance of the 

reinsurance contract, specifically, what business the reinsured is 

underwriting, how it is handling claims and whether they are 

covered by the reinsurance agreement. Access to documents enables 

the reinsurer to determine whether the cedent acted reasonably and 

in good faith in handling underlying claims and in settling and 

ceding claims to the reinsurer. Some inspection clauses provide 

access to claims files only. 

Reinsurers may choose to inspect cedents’ records on a regular basis. 

Requests for inspections or audits also may arise in the following 

circumstances: in preparation for the annual renewal of a reinsurance 

contract; when there is a change in the loss reporting pattern; when 

the cedent has not provided sufficient information in presenting 

losses; when there is a marked change in premium volume; or when 

40-40


there is another unusual event regarding either the claims or 

underwriting/premium activity. Reinsurers also often seek audits or 

inspection when cedents enter run-off or exit certain business sectors. 

The right of inspection is as broad or narrow as the particular contract 

wording provides. A typical inspection or audit clause defines 

broadly the records to which the reinsurer is entitled; clauses 

enabling the reinsurer to review “all documents referring to the 

business” under the reinsurance agreement or “any records relating 

to this reinsurance or claims in connection therewith” are common. 

Access often is provided to the reinsurer and its authorized representatives, 

allowing the use of consultants to conduct inspections. 

Use of consultants to assist in audits has become increasingly 

common as the magnitude and complexity of claims, especially in 

long-tail casualty lines, have caused reinsurers to engage independent 

auditors or consultants to perform records inspections. Access 

usually is permitted at all reasonable times and is typically provided 

where the records are normally kept. 

Documents typically requested by reinsurers during claims inspections 

include the following: 

1. The claims register; 

2. Claims bordereaux (i.e., summaries); 

3. Selected underlying claims files; and 

4. Inspection reports on claims handling facilities. 

Documents typically sought during underwriting and financial audits 

or inspections include the following: 

1. Basic underwriting information for the direct insurance, including 

the name of the insured, insured’s location, policy 

number and period, limits of liability, name of underwriter 

and underwriting analysis, broker, type of coverage and policy 

provisions; 

2. Premium information; 

3. Documentation regarding brokers, third-party administrators 

and delegations of underwriting authority; 

4. Reinsurance contract wording, underwriting guidelines, 

5. 

evaluation of risks, negotiation files; and 

Accounting files showing cessions of premiums and losses. 

A frequent inspection-related issue is the impasse that occurs when a 



reinsurer’s claim payments are delinquent and it has demanded an 

audit to verify the claims’ validity. The cedent may then refuse to 

allow the audit until the claims are paid; as a result, each party claims 

the other has breached the contract and thus the obligation to 

perform is suspended until the prior breach is remedied. Arbitration 

panels usually elide this dilemma by ordering an inspection or audit 

as a part of discovery. In one case, a court ordered a reinsurer to make 

its payments current, despite the reinsurer’s complaint that the 

cedent had refused it access to records regarding one of the treaties at 

issue. The court found the cedent’s insistence that payment be 

current before access to records was permitted to be “commercially 

reasonable” given the reinsurer’s failure to object to the cedent’s 

statement of account or pay them. The reinsurer was ordered “to 

prove the sort of mistakes cognizable in law to support an adjustment 

of the stated account” or to pay the claim [Am. Home Assurance Co. 

v. Instituto Nacional de Reaseguros, 1991 U.S. Dist. LEXIS 501, at *11 

(S.D.N.Y. 1991)]. This decision may be limited by the specific facts of 

this reinsurance relationship. 

� Cross Reference: For an example of a typical access to records 

clause in a reinsurance agreement, see § 40.39 below. 

� Cross Reference: For additional examples of inspection clauses, 

see Eric Mills Holmes, Appleman on Insurance 2d § 106.4[A]. 

z Strategic Point — Reinsurer: Reinsurance agreements should be 

drafted with an Access to Records clause allowing the reinsurer 

the right to examine the books and records of the ceding insurer 

that relate to the reinsurance. The clause should include the 

following provisions: 

1. The reinsurer has the right to inspect all books and 

documents relating to business ceded to the reinsurer 

under the reinsurance agreement; 

2. The right of inspection survives contract termination; 

3. The inspection right vests in the reinsurer or in any of its 

authorized representatives; and 

4. Access for inspection will be allowed at all reasonable 

times. 

Exception: A federal court affirmed an arbitration panel’s finding 

that, even in the absence of an audit or inspection clause, the 

cedent is obligated to furnish information reasonably requested 



by the reinsurer. The panel had denied recovery to the cedent 

after it failed to support its reinsurance claim with sufficient 

information [Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 

826, 832 (9th Cir. 1995)]. At least one commentator has expressed 

the view that access to records is so vital to the reinsurance 

relationship that it constitutes an implied right of the reinsurer in 

the absence of express wording [Robert W. Hammesfahr & Scott 

W. Wright, The Law of Reinsurance Claims 6.4 (1994)]. 

t Warning: A reinsurer’s failure to exercise the right of inspection 

may have a negative impact in a later dispute with its cedent. One 

court found a reinsurer’s fraudulent concealment claim “untenable” 

in the light of the reinsurance contract’s inclusion of a 

typical access to records clause. The court explained that the 

absence of any indication that the cedent failed to honor the 

access to records provision defeated the fraudulent concealment 

claim [Gerling Global Reinsurance Corp. v. Safety Mut. Cas. 

Corp., 1981 U.S. Dist. LEXIS 13864, at * 7 (S.D.N.Y. Aug. 7, 1981)]. 

z Strategic Point — Cedent: To the extent possible, cedents should 

develop a policy regarding the privileged information they will 

or will not disclose to their reinsurers. Some courts have found 

that coverage opinions prepared by cedent’s counsel and other 

privileged materials that are shared with reinsurers lose their 

privileged status and therefore must be disclosed to policyholders 

in direct insurance coverage litigation (at least where there is a 

conflict between the cedent and the reinsurer) [see § 40.10[2] 

below discussing the cedent’s dilemma in providing privileged 

documents to its reinsurer]. 

Consider: While reinsurers can enforce the right to inspection 

through arbitration or, if the contract does not include an arbitration 

clause, through a lawsuit, at least one court has held that 

allowing the reinsurer to inspect is not a condition precedent to 

the right to arbitrate. The court granted the cedent’s petition to 

compel arbitration despite its refusal to allow the reinsurer access 

to its records [Phila. Reinsurance Corp. v. Universale Ruckversicherungs 

A.G., 1994 U.S. Dist. LEXIS 56, at *1 (S.D.N.Y. Jan. 5, 

1994)]. 

� Cross Reference: The inspection and audit provision is often 

included within the claims cooperation clause of the reinsurance 

contract. For a discussion of claims cooperation or control (and 


40.10[2][a] New Appleman Insurance Practice Guide 

right to associate) clauses in reinsurance contracts, see § 40.11 

below. 

Consider: Cedents often ask reinsurers to sign confidentiality 

agreements before permitting access to records. While there do 

not appear to be any published decisions on this issue, it is likely 

that courts or arbitration panels would permit cedents to condition 

inspections in this manner. Arbitrators have demonstrated a 

general trend towards imposing confidentiality on the parties 

beyond that strictly provided in the reinsurance contract. For 

example, arbitrators may order the parties to treat the entire 

arbitration process, not just the outcome, as confidential. A 

reinsurer that objects to executing a reasonable confidentiality 

agreement pertaining to the inspection of records may risk 

alienating the adjudicators. 

� Cross Reference: See § 40.10[2][f] below for a discussion of the 

use of confidentiality agreements to protect a cedent’s privileged 

documents. 

� Cross Reference: For an example of a clause requiring confidentiality 

that can be added to or used in conjunction with an access 

to records provision, see § 40.40 below. 

40.10[2] Consider Whether Insurer’s Disclosure of Privileged 

Documents to Its Reinsurer Constitutes Waiver As to Third 

Parties, Including Its Insureds. 

40.10[2][a] Common Interest Doctrine. There is no cedent-reinsurer 

privilege, so whether the disclosure of otherwise privileged materials 

from one party to the other waives the privilege is determined 

by ordinary principles of privilege law, considered in the light of 

the nature of the relationship between the parties and the circumstances 

that exist at the time of disclosure. Thus, a cedent will be 

able to disclose its privileged communications to a reinsurer 

without waiving the right to assert its privilege as to other parties 

(including its insureds), depending on the nature of the cedent/ 

reinsurer relationship, specifically, whether the cedent and reinsurer 

had a “common interest” when the disclosure was made. 

(The question of nonwaiver of privilege is separate from the 

question whether the cedent is required to share privileged communications 

with the reinsurer.) The “common interest” doctrine is 

an exception to the general rule that disclosure of a privileged 

communication to a third party who is not an agent or employee of 



counsel waives any privilege that otherwise would apply to the 

communication. It is most often used as a “shield,” enabling 

parties with a common interest to share privileged information 

without waiving privilege against a third party. The common 

interest doctrine is most commonly recognized when multiple 

parties are represented by the same attorney. Communications 

made to the shared attorney to establish a litigation strategy are 

privileged as against all others, although not privileged inter sese 

[N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 366 

(D.N.J. 1992), aff’d in part and rev’d in part on other grounds, N. River 

Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995)]. The 

doctrine has been extended to situations where the parties are 

represented by separate counsel but are engaged in a common 

legal enterprise or share an identical legal interest with respect to 

the subject matter of a communication between an attorney and 

client pertaining to legal advice. The doctrine is not applicable, 

however, when the parties’ shared interests are only commercial 

[Blanchard v. Edgemark Fin. Corp., 192 F.R.D. 233, 237 (N.D. Ill. 

2000); Aetna Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s 

London, 676 N.Y.S.2d 727, 731-34 (N.Y. Sup. Ct. 1998)]. 

40.10[2][b] Disclosure Made Prior To Insurance Coverage Litigation. 

Cedents and reinsurers that have shared privileged materials 

sometimes argue that their “common interest” in the outcome of a 

coverage claim should avoid a waiver of the privilege as against 

the insured. Where coverage opinions and other privileged materials 

are generated prior to a reservation of rights or denial of claim 

by the insurer or in the absence of the anticipation of a direct 

coverage dispute, courts often reject assertion of the common 

interest doctrine and find a waiver of privilege when the cedent 

has disclosed the materials to its reinsurer. The rationale for this 

result is in part that the motivation of the cedent to provide the 

coverage opinion is to induce the reinsurer to perform under its 

contract rather than to coordinate common legal strategy. 

Example: A court found that coverage opinions disclosed by a 

cedent to its reinsurer were not protected by the attorney-client 

privilege or the work product doctrine but that even if they had 

been privileged, the common interest doctrine did not apply 

because: (i) there was no evidence that the documents were 

disclosed in anticipation of litigation; (ii) any common interest 

was commercial and not legal; and (iii) the disclosures were 

made in the ordinary course of business [Allendale Mut. Ins. 


40.10[2][b] New Appleman Insurance Practice Guide 

Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 141 (N.D. Ill. 1993)]. 

Example: In a case involving a cedent’s demand for discovery 

from a group of reinsurers, a court refused to find a common 

legal interest among the reinsurers sufficient to avoid waiver of 

attorney-client privilege, where the parties were not in litigation 

and the reinsurers’ common interests were purely commercial 

[Aetna Cas. & Sur. Co. v. Certain Underwriters at 

Lloyd’s London, 676 N.Y.S.2d 727, 731-34 (N.Y. Sup. Ct. 1998)]. 

Example: Even where a reinsurer had anticipated that coverage 

litigation would arise from a large policyholder claim, the court 

refused to recognize a common interest between the ceding 

insurer and the reinsurer and found that the attorney-client 

privilege had been waived by the disclosure of documents 

[Am. Prot. Ins. Co. v. MGM Grand Hotel — Las Vegas, 1983 

U.S. Dist. LEXIS 16423, at *15 (D. Nev. June 9, 1983)]. 

Example: A cedent’s production of documents to its reinsurer 

waived any applicable privileges as “the relationship between 

insurer and reinsurer is simply not sufficient” to invoke the 

common interest doctrine [McLean v. Cont’l Cas. Co., 1996 U.S. 

Dist. LEXIS 17503, at *2 (S.D.N.Y. 1996)]. 

Exception: A court refused to find waiver of privilege based on 

the reinsurer’s need to review the cedent’s documents to 

determine the extent of its reinsurance exposure [Great Am. 

Surplus Lines Ins. Co. v. Ace Oil Co., 120 F.R.D. 533, 538-39 

(E.D. Cal. 1988)]. 

z Strategic Point — Reinsurer: It is in both the cedent’s and the 

reinsurer’s best interests to minimize the risk that a policyholder 

might gain access to privileged information, especially 

that which reveals the strategies and thought processes of the 

cedent and its counsel in evaluating and litigating a policyholder’s 

claim. Thus, the reinsurer’s requests for privileged 

information from a cedent should be made carefully, regardless 

of whether the reinsurer believes it is entitled to the information 

or whether the cedent has customarily provided it. 

z Strategic Point — Cedent: Given the inconsistent views of 

courts considering the applicability of the common interest 

doctrine, a cedent that discloses privileged communications to 

a reinsurer risks a later finding that it has waived its privileges. 



The outcome of a privilege dispute also may depend on the 

particular jurisdiction or the forum within the jurisdiction at 

the time of disclosure. Cedents that wish to avoid waiver of 

privilege as against their policyholders by disclosing privileged 

materials to their reinsurers may consider taking the 

following measures (which may or may not be successful): 

1. Try to establish the foundation for assertion of the 

common interest doctrine by expressly stating in the 

reinsurance contract that the parties share a common 

interest and do not intend the sharing of privileged 

documents to waive any applicable privileges or protections. 

2. Consider whether disclosure of privileged information 

to the reinsurer is really necessary. For example, the facts 

necessary for a reinsurer to evaluate a settlement can be 

provided through means other than the disclosure of 

privileged materials; 

3. If disclosure must occur, enter into a confidentiality or 

common interest agreement that acknowledges a common 

interest between the cedent and reinsurer, restricts 

further disclosure of the material and endeavors to 

preserve all applicable privileges or immunities against 

disclosure [see § 40.10[2][f] for a discussion of the use 

and efficacy of confidentiality and common interest 

agreements]; 

4. If litigation or arbitration between the cedent and the 

reinsurer is already in progress, obtain a protective order 

that seeks to preserve privileges and immunities against 

waiver and includes a ruling that the parties have a 

common interest requiring the cedent to produce the 

documents. An order finding common interest might 

bolster the assertion of privilege against a claim of 

waiver in a subsequent dispute between the cedent and 

a policyholder. 

� Cross Reference: For a discussion of cases considering the 

availability of protection for privileged or confidential information 

provided by a cedent to its reinsurer, see Mitchell L 

Lathrop, Insurance Coverage for Environmental Claims 

§ 10.06[4][c]. 

z Strategic Point: Cedents and reinsurers invoking the com- 


40.10[2][c] New Appleman Insurance Practice Guide 

mon interest doctrine to avoid waiver of privilege as against a 

policyholder cannot later assert the privilege against each other 

if their interests become adverse [N. River Ins. Co. v. Phila. 

Reinsurance Corp., 797 F. Supp. 363, 366 (D.N.J. 1992)]. This can 

be an advantage or a disadvantage in a subsequent dispute 

over reinsurance payment, depending on the content of the 

privileged material. 

40.10[2][c] Disclosure Made During Course of Insurance Coverage 

Litigation. The majority of courts that have addressed the issue 

have determined that a cedent’s disclosure of privileged documents 

and communications to a reinsurer during the course of 

insurance coverage litigation does not constitute a waiver of the 

attorney-client privilege. This determination is based on the theory 

that the cedent and its reinsurer share a “common interest” in the 

outcome of the coverage litigation [Minn. Sch. Bds. Ass’n Trust v. 

Employers Ins. Co. of Wausau, 183 F.R.D. 627, 632 (N.D. Ill. 1999); 

U.S. Fire Ins. Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 

8280, at *6-7 (S.D.N.Y. 1989); Great Am. Surplus Lines Ins. Co. v. 

Ace Oil Co., 120 F.R.D. 533, 537-38 (E.D. Cal. 1988)]. The fact that 

the reinsurer is not a party defendant is of little significance. Some 

courts have emphasized the cedent’s obligation to keep its reinsurer 

apprised of the status of the coverage dispute and the 

necessity of disclosure — particularly where such disclosure is 

made pursuant to an inspection or cooperation clause. The doctrine 

was similarly applied to preclude waiver of privilege as 

against an excess insurer overlying the cedent, where the cedent 

had disclosed a memorandum to its reinsurer [U.S. Fire Ins. Co. v. 

Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280, at *6-8 

(S.D.N.Y. 1989)] and as against a reinsurer, where the insurer had 

disclosed privileged material to another reinsurer [Employer Reinsurance 

Corp. v. Laurier Indem. Co., 2006 U.S. Dist. LEXIS 10943, 

at *6 (M.D. Fla. 2006)]. In most circumstances, the involvement of 

a broker as a conduit for disclosure of privileged information does 

not by itself effect a waiver [see Minn. Sch. Bds. Ass’n Ins. Trust v. 

Employers Ins. Co. of Wausau, 183 F.R.D. 627, 631 (N.D. Ill. 1999); 

U.S. Fire Insurance Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. 

LEXIS 8280, at *4-7 (S.D.N.Y. July 19, 1989); but see U.S. v. Pepper’s 

Steel & Alloys, Inc., 1991 U.S. Dist. LEXIS 21563, at *8-10 (S.D. Fla. 

1991)]. 

Exception: A court found that there was no “unity of interest” 

protecting from disclosure correspondence between an insurer 


Understanding Reinsurance 40.10[2][e] 

and reinsurer regarding an insured’s claim that had ripened 

into litigation. Although their commercial interests coincided 

to some extent, the insurer failed to establish that it coordinated 

legal strategy with its reinsurer [Reliance Ins. Co. v. Am. Lintex 

Corp., 2001 U.S. Dist. LEXIS 7140, at *10-11 (S.D.N.Y. 2001)]. 

40.10[2][d] Disclosure Made After Resolution of Insurance Coverage 

Litigation But Prior to Institution of Arbitration or Litigation Between 

Cedent And Reinsurer. When a cedent wishes to disclose privileged 

information to its reinsurer after settlement or adjudication of an 

underlying coverage action, but prior to the institution of arbitration 

or litigation against the reinsurer (perhaps in an effort to 

persuade the reinsurer of the legitimacy of the ceded losses and to 

avoid a reinsurance dispute), it is unclear whether the common 

interest doctrine will apply. At least one court has declared that a 

cedent’s disclosure to its reinsurer is not in furtherance of a 

“common interest” where disclosed after settlement with the 

insured but prior to litigation/arbitration between the cedent and 

reinsurer. As the court explained: 

North River and CIGNA had no common legal interest. On the 

contrary, their interests . . . were antagonistic. In the process of seeking 

payment from CIGNA under their reinsurance contract, North River 

provided the [privileged memos], apparently hoping that CIGNA 

would be persuaded to pay. It was not, and litigation ensued. At no 

point did North River and CIGNA engage in a common legal enterprise, 

and the common interest doctrine therefore does not apply” 

[North River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at 

*22-23 (S.D.N.Y. 1995)]. 

40.10[2][e] Disclosure Made During Course of Reinsurance Litigation. 

When a cedent voluntarily discloses privileged communications to 

a reinsurer during the course of a dispute involving a claim for 

reinsurance, it may not have the ability to assert the common 

interest doctrine to protect against the assertion that the privilege 

has been waived. A case where a reinsurer attempted to compel 

production of its cedent’s privileged documents by arguing that 

the parties had a common interest sheds some light on the issue. In 

that case, the court rejected the common interest argument, finding 

that “[t]he interests of the ceding insurer and the reinsurer may be 

antagonistic in some respects and compatible in others. Thus, a 

common interest cannot be assumed merely on the basis of the 

status of the parties” [N. River Ins. Co. v. Columbia Cas. Co., No. 

90 Civ. 2518 (MLJ), 1995 U.S. Dist. LEXIS 53, at *12 (S.D.N.Y. Jan. 5, 

1995)]. The court added: “[w]hile their commercial interests coin- 


40.10[2][f] New Appleman Insurance Practice Guide 

cided to some extent, their legal interests sometimes diverge, as 

demonstrated by the instant litigation. In short [the reinsurer’s] 

only argument for finding a common interest is that the two parties 

stand in the relation of reinsurer to ceding insurer, and that is 

insufficient” [id. at 15]. 

40.10[2][f] Use of Confidentiality and Common Interest Agreements. 

A cedent that discloses privileged materials to its reinsurer risks 

waiving the privilege as against its policyholders, unless it can 

demonstrate a common interest between the cedent and reinsurer 

that avoids the waiver [see § 40.10[2][b] above discussing application 

of the common interest doctrine to the reinsurance relationship]. 

Courts have inconsistently recognized a common interest 

between cedents and reinsurers, and the outcome of a waiver 

dispute may depend on the reinsurer/cedent relationship at the 

time of disclosure. Cedents and reinsurers that wish to avoid a 

waiver of privilege can execute confidentiality or common interest 

agreements to try to preserve applicable privileges or immunities 

against disclosure or, more precisely, to indicate the factual circumstances 

and understandings that exist at the time of disclosure. 

A demonstration through an agreement that the cedent and 

reinsurer mutually intended to respect and maintain the confidentiality 

of privileged documents may persuade a court that the 

privilege and work product protection should be maintained as 

against a policyholder who is using the fact of disclosure to gain 

access to documents to which it ordinarily would not be entitled. 

A confidentiality agreement may not, however, provide full protection 

against a claim for disclosure. Put differently, a confidentiality 

or common interest agreement does not create a privilege; 

rather, it confirms the underlying circumstances at the time of 

disclosure so as to confirm the lack of any intention to effect a 

waiver as against third parties. 

Thus, a common interest (or joint defense) agreement may provide 

waiver protection by laying out the bases for the existence of a 

common interest between the cedent and its reinsurer. This may 

better the parties’ position if a waiver claim is later asserted. A 

well-drafted common interest agreement may convince a court 

that the parties have carefully considered the waiver issue and 

intended to protect against further disclosure. 

Examples — Waiver: A court allowing disclosure despite the 

existence of a confidentiality agreement reasoned that: “[t]he 

agreement does not alter the objective fact that the confidenti- 


Understanding Reinsurance 40.10[2][f] 

ality has been breached voluntarily . . . The agreement is 

merely a contract between two parties to refrain from raising 

the issue of waiver or from otherwise utilizing the information 

disclosed. Plaintiff has no genuine claim of confidentiality to 

the documents it produced . . . .” [Chubb Integrated Sys. Ltd. 

v. Nat’l Bank of Wash., 103 F.R.D. 52, 67-68 (D.D.C. 1984)]. 

Another court, refusing to find a common interest precluding 

waiver, explained that: “[a] private agreement by the parties to 

protect communications cannot create a privilege” [Aetna Cas. 

& Sur. Co. v. Certain Underwriters at Lloyd’s London, 676 

N.Y.S.2d 727, 733 (N.Y. Sup. Ct. 1998)]. 

Examples — No waiver: One court found that disclosure to a 

party pursuant to a confidentiality agreement did not substantially 

increase the opportunity for an adversary to obtain the 

document and therefore did not constitute waiver of work 

product protection, although the court did not determine 

whether the common interest doctrine actually applied [BASF 

Aktiengesellschaft v. Reilly Indus., 2004 U.S. Dist. LEXIS 21969, 

at *13 (S.D. Ind. Oct. 19, 2004)]. Another court similarly found 

that, “while not dispositive,” disclosure pursuant to a confidentiality 

agreement militated against a finding of waiver of 

work product protection [SmithKline Beecham Corp. v. Pentech 

Pharm., Inc., 2001 U.S. Dist. LEXIS 18281, at *15-16 (N.D. 

Ill. 2001)]. A court considering the confidential exchange of 

legal advice and information pursuant to a cross-consultation 

agreement among insurance companies and Lloyd’s syndicates 

determined that the parties shared a common interest sufficient 

to preclude waiver of attorney-client privilege and that it was 

clear they shared the expectation that their communications 

would remain confidential [Travelers Cas. & Sur. Co. v. Excess 

Ins. Co., Ltd., 197 F.R.D. 601, 607 (S.D. Ohio 2000)]. 

z Strategic Point — Cedent: A confidentiality or common interest 

agreement may be particularly helpful in maintaining 

protection under the work product doctrine, which could 

apply to many of the disclosed documents. While courts have 

often taken a stricter view of the attorney-client privilege and 

have been quick to find a waiver where the confidentiality that 

the privilege protects has been breached, courts applying the 

work product immunity generally have been more tolerant of 

disclosure to third parties. The work product immunity will 

not be deemed waived “unless the disclosure is inconsistent 


40.10[3][a] New Appleman Insurance Practice Guide 

with maintaining secrecy from possible adversaries” [U.S. Fire 

Ins. Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280, 

at *7 (S.D.N.Y. July 20, 1989) (citation omitted); Mitchell L. 

Lathrop, Insurance Coverage for Environmental Claims 

§ 25.04]. The analysis should “focus on whether the disclosures 

in issue increased the likelihood that a current or potential 

opponent in litigation would gain access to the disputed 

documents” [In re Imperial Corp. of Am. v. Shields, 167 F.R.D. 

447, 454 (S.D. Cal. 1995), aff’d on subsequent appeal, 92 F.3d 1503 

(9th Cir. 1996)]. In some circumstances, a cedent should be able 

to argue that disclosure of work product material to a reinsurer 

under the auspices of a confidentiality agreement has not 

increased the likelihood that a current or potential opponent in 

litigation (i.e., a policyholder) would gain access to the disputed 

documents. 

40.10[3] Consider Reinsurer’s Ability to Compel Production of Cedent’s 

Privileged Documents. 

40.10[3][a] Consider Whether Inclusion of Access to Records Clause 

Constitutes Waiver. In some circumstances, a ceding insurer may 

wish to withhold privileged documents from a reinsurer, perhaps 

to avoid a potential waiver of privilege which would obligate the 

cedent to provide the documents to its insured. A frequently raised 

issue is the extent to which access-to-records clauses allow reinsurers 

to compel production of documents contained in the 

cedent’s files that are subject to attorney-client privilege or work 

product protection. Several types of documents in a ceding insurer’s 

files could be subject to privilege or immunity as against the 

reinsurer, including: 

1. Claims counsel reports regarding the defense of policyholders; 

2. Expert reports or analyses of a claim by the insurer’s or 

insured’s personnel concerning the defense of a claim; 

3. Coverage analyses by the cedent’s in-house or outside 

counsel; and 

4. Draft pleadings and communications with counsel regarding 

those pleadings. 

Nevertheless, reinsurers may have a legitimate interest in reviewing 

such documents. However, the courts that have addressed the 

interplay between the contractual obligation to permit inspection 



and claims of privilege or work product protection have found that 

the mere inclusion of “access to records” and “cooperation” 

clauses in reinsurance contracts do waive the cedent’s privilege as 

against the reinsurer [N. River Ins. Co. v. Phila. Reinsurance Corp., 

797 F. Supp. 363, 369 (D.N.J. 1992), aff’d in part and rev’d in part on 

other grounds, N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 

1194 (3d Cir. 1995); Gulf Ins. Co. v. Transatlantic Reinsurance Co., 

788 N.Y.S.2d 44, 45-46 (N.Y. App. Div. 2004)]. As one court 

explained: “Although a reinsured may contractually be bound to 

provide its reinsurer with all documents or information in its 

possession that may be relevant to the underlying claim adjustment 

and coverage determination, absent more explicit language, 

it does not through a cooperation [or inspection] clause give up 

wholesale its right to preserve the confidentiality of any consultation 

it may have with its attorney concerning the underlying claim 

and its coverage determination” [N. River Ins. Co. v. Phila. 

Reinsurance Corp., 797 F. Supp. at 369]. Another court reasoned 

that the access to records and cooperation clauses do not waive 

privilege because the cedent’s obligations under these provisions 

end when the cedent and reinsurer become adversaries [U.S. Fire 

Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 

7, 1992), reported in Mealey’s Litigation Reports: Reinsurance, Vol. 

4, No. 4 at F-2]. 

40.10[3][b] Know When Privileged Documents Are “In Issue” Therefore 

Requiring Production by Cedent. Some reinsurers seeking access 

to privileged documents under an inspection clause have argued 

that the cedent waived any applicable privileges by putting the 

subject matter of the documents in issue in the dispute between the 

parties. The “in issue” or “at issue” exception to the attorney-client 

privilege applies when a party asserts a claim or defense that he 

intends to prove by use of the privileged materials [N. River Ins. 

Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *17 (S.D.N.Y. 

1995)]. Often, the “in issue” exception is an application of waiver 

principles, where the courts find that the party intending to rely on 

privileged materials to prove its claim or defense implicitly waives 

the privilege. (The question of the scope of that waiver is tethered 

to the offer of proof the party relying on the privileged materials 

intends to make.) In the majority of the reported decisions considering 

the “in issue” exception in the context of a reinsurance 

dispute, courts have determined that the “in issue” exception has 

not applied. [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. 

LEXIS 53, at *16-17 (S.D.N.Y. 1995); N. River Ins. Co. v. Phila. 


40.10[3][b] New Appleman Insurance Practice Guide 

Reinsurance Corp., 797 F. Supp. at 370-71; U.S. Fire Ins. Co. v. 

Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992), 

reported in Mealey’s Litigation Reports: Reinsurance, Vol. 4, No. 4 at 

F-2]. Several courts have reasoned that merely placing the broad 

question of coverage in issue is insufficient to constitute a waiver of 

the privilege [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. 

Dist. LEXIS 53, at *17; N. River Ins. Co. v. Phila. Reinsurance Corp., 

797 F. Supp. at 370-71]. 

It should be noted, however, that in a recent decision a court did 

find a limited waiver based on the “in issue” doctrine. In American 

Re-Insurance Co. v. United States Fid. & Guar. Co. [No. 604517/02 

(N.Y. Sup., App. Div., 1st Dept. May 29, 2007), reported in Mealey’s 

Litigation Reports: Reinsurance, Vol. 18, No. 3 at B-1], the court 

ruled that a cedent waived attorney-client privilege when its 

reinsurance director responsible for preparing the bill to the 

reinsurers testified during a deposition that in preparing the bill he 

sought guidance from an in-house attorney who explained to him 

that the settlement of the insured’s claim was based on California’s 

“all sums” and “non-accumulation” rules. The court ruled that the 

reinsurers were entitled to seek further testimony and the production 

of documents regarding the presentation of the reinsurance 

claim to the extent that such discovery related to the disclosures 

made by the reinsurance director during his deposition. 

Example: A cedent refused to produce privileged documents 

that revealed its internal legal assessments of the claims for 

which it was requesting reinsurance payment in a reinsurance 

arbitration. Although the arbitration panel ordered the cedent 

to produce the documents and warned that it would draw 

whatever negative inference it deemed appropriate from a 

failure to produce, after the cedent refused to produce the 

material (on the basis that it wished to avoid waiver of 

privilege in future dealings with its insureds) the panel ordered 

the reinsurer to pay the balance owed. The reinsurer’s motion 

to vacate the panel’s order was denied [Nat’l Cas. Co. v. First 

State Ins. Group, 430 F.3d 492, 494-97 (1st Cir. 2005)]. 

Exception — Notice Condition Precedent to Coverage: In a direct 

insurance coverage dispute where timely notice was a condition 

precedent to coverage, a court found that, by seeking 

coverage, the insured put “in issue” its knowledge regarding 

its potential liability to the claimant and regarding its notice 


Understanding Reinsurance 40.10[3][c] 

obligations. The court emphasized that the insured had the 

burden to prove that notice was timely, and therefore it had 

impliedly waived the attorney-client privilege as to communications 

with its attorney relevant to knowledge of its potential 

liability [Century 21, Inc. v. Diamond State Ins. Co., 2006 U.S. 

Dist. LEXIS 56733, at *5-10 (S.D.N.Y. 2006)]. 

40.10[3][c] Consider Application of Common Interest Doctrine to 

Compel Production of Cedent’s Privileged Documents. 

40.10[3][c][i] Prior to Dispute Between Cedent and Reinsurer. Reinsurers 

have tried to use the common interest doctrine as a 

“sword” — to gain access to a privileged materials over its 

cedent’s objection. It is unclear whether courts will find that a 

common interest exists if the parties are not involved in a legal 

dispute. In many of the cases finding common interest protection 

as against the policyholder [see § 40.10[2][c] above], the 

cedents and reinsurers were found to be united in interest due to 

the cedent’s involvement in coverage litigation at the time of 

disclosure. In contrast, in the few reported cases rejecting 

common interest claims by reinsurers, the interests between 

cedents and reinsurers were already adverse [see § 40.10[3][c][ii] 

below]. The absence of an adversarial relationship between 

cedent and reinsurer may not guarantee a common interest 

forcing disclosure, however. At least one court has advised that 

a cedent’s disclosure to its reinsurer was not in furtherance of a 

“common interest” at the time the cedent sought payment under 

the reinsurance contract and before there was a legal dispute [N. 

River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at 

*15 (S.D.N.Y. 1995)]. In another case, the court ordered disclosure 

of allegedly privileged documents to a policyholder based 

on the cedent’s disclosure to a reinsurer, when there was no 

indication as to whether the reinsurer/cedent relationship was 

adversarial at the time of disclosure [McLean v. Cont’l Cas. Co., 

1996 U.S. Dist. LEXIS 17503, at *2 (S.D.N.Y. 1996)]. In addition, 

one court has gone so far as to reject the theory that a common 

interest ever exists between cedent and reinsurer, even at the 

pre-dispute stage, stating that “the common interest doctrine is 

completely unlashed from its moorings in traditional privilege 

law when it is held broadly to apply in contexts other than when 

there is dual representation” [N. River Ins. Co. v. Phila. Reinsurance 

Corp., 797 F. Supp. 363, 367 (D.N.J. 1992) aff’d in part and 

rev’d in part on other grounds, N. River Ins. Co. v. CIGNA 



Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995)]. 

40.10[3][c][ii] During Reinsurance Dispute Between Cedent and 

Reinsurer. In general, reliance on the purported “common interest” 

between parties at odds with each other is not a sound basis 

to predicate the compelled disclosure of privileged communications. 

In the courts, reinsurers seeking privileged documents 

under the common interest doctrine have been unsuccessful 

when the parties are already embroiled in a reinsurance dispute 

[N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, 

at *5-15 (S.D.N.Y. 1995); N. River Ins. Co. v. Phila. Reinsurance 

Corp., 797 F. Supp. 363, 366-68 (D.N.J. 1992) aff’d in part and rev’d 

in part on other grounds, N. River Ins. Co. v. CIGNA Reinsurance 

Co., 52 F.3d 1194 (3d Cir. 1995); U.S. Fire Ins. Co. v. Phoenix 

Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992), reported 

in Mealey’s Litigation Reports: Reinsurance, Vol. 4 No. 4 at F-2]. 

Reinsurers may be less likely to obtain a cedent’s privileged 

documents during reinsurance litigation because the reinsurer’s 

alleged breach of the reinsurance agreement suspends the 

cedent’s disclosure obligations pursuant to the inspection clause 

[U.S. Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. 

Sup. Ct. Aug. 7, 1992), reported in Mealey’s Litigation Reports: 

Reinsurance, Vol. 4 No. 4 at F-1]. 

Reinsurers are more likely to obtain a cedent’s privileged 

documents regarding the underlying claim in arbitrations, however, 

where arbitrators can more easily impose confidentiality 

restrictions and are not bound to follow strict rules of law or 

evidence. In all likelihood, if the Panel orders disclosure in a 

confidential proceeding over the cedent’s objection, that should 

not waive privilege vis-a-vis others. 

40.10[4] Understand When Insured Is Entitled to Discover Its Insurer’s 

Reinsurance Information. Policyholders often seek access to correspondence, 

reports, agreements and other materials exchanged between 

the cedent and its reinsurer which may or may not otherwise be 

subject to protection by the attorney-client privilege or the work 

product doctrine. In some instances, policyholders hope to 

strengthen coverage claims by finding admissions or inconsistencies 

in these materials. Ceding insurers typically oppose requests for 

reinsurance information by arguing that it is not relevant to the 

underlying coverage dispute or that the information is confidential 

and proprietary. 



A majority of courts have held that the existence of reinsurance 

agreements and the terms of coverage are relevant to insurance 

coverage disputes and therefore discoverable. Many of these decisions 

are premised on the disclosure mandated by Rule 26(a)(1)(D) of 

the Federal Rules of Civil Procedure, which states that “a party shall, 

without awaiting a discovery request, provide to other parties . . . 

any insurance agreement under which any person carrying on an 

insurance business may be liable to satisfy part or all of a judgment 

which may be entered in the action or to indemnify or reimburse for 

payments made to satisfy the judgment” [Country Life Ins. Co. v. St. 

Paul Surplus Lines Ins. Co., 2005 U.S. Dist. LEXIS 39691, at *28-29 

(C.D. Ill. 2005); Medmarc Cas. Ins. Co. v. Arrow Int’l, Inc., 2002 U.S. 

Dist. LEXIS 15082, at * 9 (E.D. Pa. 2002); Mo. Pac. R.R. Co. v. Aetna 

Cas. & Sur. Co., 1995 U.S. Dist. LEXIS 22157, at *6-7 (N.D. Tex. 1995); 

Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Cont’l Ill. Corp., 116 

F.R.D. 78, 83-84 (N.D. Ill. 1987)]. In some instances, courts have 

acknowledged that reinsurance agreements contain proprietary or 

confidential information and ordered production of the contracts 

pursuant to a protective order, or have simply noted the existence of 

a confidentiality agreement precluding wider dissemination of the 

material [Ohio Mgmt., LLC v. James River Ins. Co., , 2006 U.S. Dist. 

LEXIS 47516, at *6 (E.D. La. 2006); Peco Energy Co. v. Ins. Co. of N. 

Am., 852 A.2d 1230, 1234 (Pa. Super. Ct. 2004)]. 

Ceding insurers’ attempts to block access to other types of reinsurance 

information, including reports and other correspondence between 

cedents and reinsurers, have yielded mixed results. Efforts to 

avoid discovery are most successful when the policyholder fails to 

indicate how the reinsurance information is relevant to the coverage 

dispute or might lead to the discovery of admissible evidence. For 

example, access to communications between cedents and reinsurers 

has been denied where the policyholder has argued that it hoped to 

gather evidence showing that the policy language at issue was 

ambiguous [Zurich Am. Ins. Co. v. Keating Bldg. Corp., No. 04-1490 

(D.N.J. Dec. 29, 2006), reported in Mealey’s Litigation Reports: Insurance, 

Vol. 21, No. 16, at 7; Country Life Ins. Co. v. St. Paul Surplus 

Lines Ins. Co., 2005 U.S. Dist. LEXIS 39691, at *30-32 (C.D. Ill. 2005); 

Medmarc Cas. Ins. Co. v. Arrow Int’l, Inc., 2002 U.S. Dist. LEXIS 

15082, at * 13 (E.D. Pa. 2002); Rhone-Poulenc Rorer, Inc. v. Home 

Indem. Co., 139 F.R.D. 609, 612 (E.D. Pa. 1991)]. 

Reinsurance communications have been found relevant and discoverable 

typically when there is a defense raised by the ceding insurer 

in a direct coverage dispute, such as misrepresentation/ 



nondisclosure or lack of late notice, which puts the reinsurance 

information at issue, or to reconstruct a lost policy or provide 

extrinsic evidence of an ambiguous policy provision. 

Example — Reinsurance Communications Relevant: Insurers’ communications 

with reinsurers were found relevant to a claim for 

rescission of the policies based on the policyholder’s alleged 

misrepresentations as to its financial condition. The court reasoned 

that pre-policy-issuance communications with reinsurers 

could reveal what financial information the insurers relied upon 

when deciding to issue the policies [Nat’l Union Fire Ins. Co. of 

Pittsburgh, Pa. v. Cont’l Ill. Corp., 116 F.R.D. 78, 82 (N.D. Ill. 

1987)]. In addition, post-issuance communications with reinsurers 

were relevant to the insurers’ allegation that the policyholder 

breached its duty to cooperate with insurers [id. at 82-83]. 

Similarly, communications between an insurer and its reinsurer 

were relevant to an insurer’s claim for rescission based on the 

policyholder’s alleged misrepresentation concerning his health 

[Sotelo v. Old Republic Life Ins., 2006 U.S. Dist. LEXIS 68387, at * 

8 (N.D. Cal. 2006)]. 

Example — Reinsurance Communications Relevant: Reinsurance 

information was directly relevant to rebutting the insurer’s 

affirmative defense of late notice because evidence that reinsurers 

were given timely notice would tend to establish that the insurers 

themselves had notice [Rhone-Poulenc Rorer, Inc. v. Home Indem. 

Co., 1991 U.S. Dist. LEXIS 16336, at *6-7 (E.D. Pa. 1991); Peco 

Energy Co. v. Ins. Co. of N. Am., 852 A.2d 1230, 1233-34 (Pa. 

Super. Ct. 2004)]. 

Example — Reinsurance Communications Relevant: Notes and 

memoranda prepared by reinsurers’ claim representatives concerning 

information relayed by the cedent’s claims personnel 

concerning a policyholder’s claim were relevant to a direct 

coverage dispute. The court reasoned that the materials were 

likely to elucidate conflicts between the cedent and its reinsurers 

which might explain why the ceding insurer had refused to pay 

the claim [Allendale Mut. Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D. 

132, 139 (N.D. Ill. 1993)]. 

Example — Reinsurance Communications Irrelevant: A federal district 

court for the District of Columbia ordering discovery of the 

existence and contents of the ceding insurer’s reinsurance agree- 



ments denied discovery of other reinsurance communications on 

relevance grounds, also noting that “the correspondence may 

well constitute proprietary information” [Potomac Elec. Power 

Co. v. Cal. Union Ins. Co., 136 F.R.D. 1, 3 (D.D.C. 1990)]. 

t Warning: If a cedent summarizes advice given by coverage 

counsel in correspondence with its reinsurer, the summary information 

may be deemed to constitute ordinary business communications 

and will therefore not be protected from disclosure 

under the attorney-client privilege or work product immunity [see 

Am. Cas. Co. of Reading Pa. v. Gen. Metals of Tacoma, No. C 

92-5192B (W.D. Wash. April 13, 1994), reported in Mealey’s Litigation 

Reports: Reinsurance, Vol. 4, No. 23, at B-1]. 

� Cross Reference: For a discussion of additional cases considering 

the discovery of reinsurance information in coverage actions 

between a ceding insurer and its insured, see Eric Mills Holmes, 

Appleman on Insurance 2d § 107.3; Mitchell L. Lathrop, Insurance 

Coverage for Environmental Claims § 25.05[2][c]. 

40.11 Consider Reinsurer’s Rights Under Right to Associate Clause or Claims 

Control Clause. Related to the right to inspect the cedent’s records is the 

reinsurer’s right to associate in, or to control, the defense of claims. These 

rights are embodied in “right to associate” or “claims control” clauses. 

Under a right to associate (sometimes called a “claims cooperation”) 

clause, the reinsurer’s exercise of the right is discretionary, but the cedent 

is required to make prompt disclosure of information that the reinsurer 

needs to decide whether to associate with the cedent in defense of a claim. 

A right to associate clause typically gives the reinsurer the right to 

participate “in the defense and control of any claim, suit or proceeding 

which may involve [the] reinsurance with the full cooperation of [the 

cedent]” [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1055 

(2d Cir. 1993)]. A court considering this language declared that the phrase 

“which may involve [the] reinsurance” does not mean “which may 

involve insurance underlying this reinsurance” [Unigard Sec. Ins. Co. Inc. 

v. N. River Ins. Co., 762 F. Supp. 566, 587 (S.D.N.Y. 1991), aff’d in part, rev’d 

in part, 4 F.3d 1049, 1055 (2d Cir. 1993)]; therefore, there is no right to 

associate if there is no direct impact on the reinsurance coverage [id.]. 

Claims control clauses are not typical. They go further than right to 

associate clauses in giving the reinsurer control over claims settlements. 

These provisions, sometimes termed “counsel and concurrence” or “concur 

and consent” clauses,” not only give the reinsurer the right to be 



involved in the adjustment of a claim but also obligate the cedent to confer 

with and secure the agreement of the reinsurer to settle claims of certain 

types or amounts in order to be indemnified. In the U.S. market, counsel 

and concur provisions are usually found in clauses that provide excess 

limits and extra-contractual (“ECO”) coverage [see § 40.14 below for a 

general discussion of the reinsurer’s obligation to reimburse the cedent for 

these types of losses]. Some clauses go further still and give the reinsurer 

broad authority over claims handling. 

A cedent’s failure to provide the notice required by a claims cooperation 

clause can arguably provide a defense to coverage [Liberty Mut. v. Gibbs, 

773 F.2d 15, 17-18 (1st Cir. 1985); see § 40.09 above for a complete 

discussion of the cedent’s notice obligations and the consequences of a 

breach of this obligation]. Similarly, a cedent’s failure to comply with the 

terms of a claims control clause may provide an affirmative defense to a 

claim for payment [Certain Underwriters at Lloyd’s London v. Home Ins. 

Co., 783 A.2d 238, 239-242 (N.H. 2001); Argonaut Ins. Co. v. Certain 

London Mkt. Reinsurers, No. 03-317805 (Cal. Super. Ct. Nov. 13, 2006), 

reported in Mealey’s Litigation Report: Reinsurance, Vol. 17, No. 15 at A-4]. 

However, denial of coverage for a violation of the right to associate may 

not succeed if the reinsurer cannot show that it was prejudiced and the 

cedent did not act in bad faith [see N. River Ins. Co. v. Cigna Reinsurance 

Co., 52 F.3d 1194, 1216 (3d Cir. 1995); Unigard Sec. Ins. Co. v. N. River Ins. 

Co., 4 F.3d 1049, 1068-70 (2d Cir. 1993)]. 

Example: Reinsurers were required to indemnify a cedent for expenses 

incurred after instructing the cedent how to handle a claim pursuant to 

a claims control clause providing for indemnification “for any and all 

loss or expense which the Reinsured may sustain by reason of having 

fulfilled [Reinsurers’] instruction” [La Reunion Francaise v. Martin, 

1996 U.S. App. LEXIS 9578, at *3-4 (2d Cir. 1996) (unpublished 

opinion)]. 

t Warning: Reinsurers that choose to associate in the handling of a 

claim should do so cautiously, in order to preserve the legal position 

that there is no privity of contract between an insured or a third-party 

claimant in an action against an insured and the reinsurer [see 

§ 40.05[1] above discussing the general lack of privity of contract in 

reinsurance arrangements]. Reinsurers that are intimately involved in 

the claims-handling process run the risk of being held directly liable to 

policyholders or third parties for the cedent’s insurance obligations or 

its settlement actions [see Slotkin v. Citizens Cas. Co. of New York, 614 

F.2d 301, 316-17 (2d Cir. 1979), adhered to on rehearing, 614 F.2d 301, 323; 



O’Hare v. Pursell, 329 S.W.2d 614, 621 (Mo. 1959)]. At a minimum, a 

reinsurer increases the likelihood that a court will order discovery 

against it in a coverage case so as to enable the policyholder to test 

whether the reinsurer should be found to be an alter ego or the real 

party in interest; this is especially a risk where the cedent is a fronting 

insurer or where the reinsurer is exposed to paying the bulk of the 

policyholder’s claim. In one case where the reinsurance contract was 

viewed by the court as not otherwise covering punitive damages, a 

reinsurer was obligated to pay its proportionate share of liability for its 

cedent’s bad faith failure to settle a third-party claim against its 

insured, where the reinsurer was engaged in a joint enterprise with the 

cedent in defending and settling the third-party action [Peerless Ins. 

Co. v. Inland Mut. Ins. Co., 251 F.2d 696, 703-04 (4th Cir. 1958); but see 

Reid v. Ruffin and Granite Mut. Ins. Co., 469 A.2d 1030, 1033 (Pa. 

1983)]. To avoid potential liability for claims handling and settlement, 

reinsurers should carefully consider whether or not to incorporate a 

claims control or counsel and concurrence clause in their reinsurance 

agreements and the appropriate degree of participation in the claims 

process. 

Consider: A clause requiring the reinsurer’s consent to settlements may 

be in conflict with a “follow the settlements” provision, which 

obligates the reinsurer to indemnify its cedent for any losses within the 

terms of the original policy, as long as the cedent has acted in good 

faith. 

� Cross Reference: For a discussion of follow the settlements clauses in 

reinsurance agreements, see § 40.17 below. 

� Cross References: For an example of a claims cooperation clause, see 

§ 40.41 below. 


V. CONSIDERING REINSURER’S OBLIGATIONS. 

40.12 Determine Extent of Coverage. The “reinsuring” or “business covered” 

clause of a reinsurance treaty typically determines the extent of the 

reinsurer’s liability to the cedent [see §§ 40.30, 40.31 and 40.32 below for 

examples of reinsuring clauses]. This clause specifies the types of risks 

included in the agreement and the percentage of business covered (for a 

quota share contract) or the attachment point and limits of the agreement 

(for an excess of loss contract). Facultative certificates, in turn, typically 

include a “liability” clause, which specifies the liability of the reinsurer 

and provides that the reinsurance certificate will cover only the kinds of 

liability covered in the original policy. Facultative certificates often include 

“follow the form” clauses, which provide that the reinsurance coverage 

dovetails with or adopts as its own the terms of the coverage of the 

underlying policy. This presumption is not absolute, however, and can be 

overridden by express wording in the certificate creating a nonconcurrency 

as to liability. As a general rule, in both treaties and 

facultative certificates, the extent of the reinsurer’s liability is determined 

by the express wording of the reinsurance agreement. 

A reinsurer will not be held liable beyond the terms of the reinsurance 

contract merely because the ceding insurer has sustained a loss. The fact 

that the direct insurer has paid a claim does not establish that it is entitled 

to indemnity from the reinsurer because the claim might have been one for 

which the insurer was not bound to make payment [Mich. Millers Mut. 

Ins. Co. v. N. Am. Reinsurance Corp., 452 N.W.2d 841, 842-43 (Mich. Ct. 

App. 1990); Independence Ins. Co. v. Republic Nat’l Life Ins. Co., 447 

S.W.2d 462, 467-69 (Tex. Civ. App. 1969)]. For example, cedents that make 

ex gratia or “voluntary” payments (payments made in the absence of any 

legal obligation to pay) are not entitled to indemnity from their reinsurers 

unless the reinsurance contract provides to the contrary [Am. Ins. Co. v. N. 

Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 81 (2d Cir. 1982); Lexington Ins. 

Co. v. Prudential Reinsurance Co. of Am., 1997 Mass. Super. Lexis 593, at 

* 10-19 (Mass. Super. Ct. 1997)]. 

Reinsuring clauses should be drafted carefully to avoid disputes concerning 

the scope of coverage [N. River Ins. Co. v. Cigna Reinsurance Co., 52 

F.3d 1194, 1206-07 (3d Cir. 1995)]. 

Example: A reinsurer was not liable to cover a payment for lost cargo 

under a facultative certificate where the loss was due to a “shore risk” 

because “the defendant never consented to reinsure this loss not 

covered in the original insurance policy” [Ins. Co. of N. Am. v. U.S. Fire 



Ins. Co., 322 N.Y.S.2d 520, 524 (N.Y. Sup. Ct. 1971)]. 

Example: A reinsurance certificate referring to the direct policy’s terms 

as the limitations on liability could not be construed to provide 

coverage for claims that were expressly excluded by the underlying 

policy [Ambassador Ins. Co., Inc. v. Fortress Re, Inc., 1983 U.S. Dist. 

LEXIS 14685, at *31 (M.D.N.C. Aug. 12, 1983)]. 

Example: A cedent’s motion for summary judgment on its indemnity 

claim against its reinsurer was denied where a substantial portion of 

the settlement paid to the insured was attributable to legal expenses, a 

loss not reinsured under the facultative certificate [Affiliated FM Ins. 

Co. v. Employers Reinsurance Corp., 2004 U.S. Dist. LEXIS 27961, at 

*43 (D.R.I. 2004)]. The cedent also had failed to demonstrate that the 

losses actually occurred during the coverage period of the certificate 

[id. at 46]. 

Example: Indemnity under facultative certificates was limited to the 

amounts expressly stated in the certificates and was not coextensive 

with the underlying policies: “if [the ceding insurer] were allowed to 

recover its full liability to [the insured] simply because it held some 

amount of reinsurance, the negotiated coverage limits of the reinsurance 

certificates would be rendered meaningless” [Travelers Cas. and 

Sur. Co. v. Constitution Reinsurance Corp., 2004 U.S. Dist. LEXIS 

21829, at *13 (E.D. Mich. 2004)]. 

Cedent’s Perspective: Many reinsurance contracts include “follow the 

fortunes” or “follow the settlements” clauses, which have been interpreted 

to embody the principle that a reinsurer will indemnify its 

cedent for any losses arguably within the terms of the original policy 

so long as the cedent has acted in good faith. These clauses operate 

primarily for the benefit of cedents, allowing them some measure of 

certainty in calculating expected reinsurance recoveries and discouraging 

reinsurers from challenging a cedent’s coverage decisions [See 

§§ 40.17, 40.18 and 40.19 for a complete discussion of follow the 

fortunes and follow the settlements clauses]. Occasionally disputes 

arise in which cedents assert that “follow the fortunes” or “follow the 

settlements” clauses obligate a reinsurer to provide indemnity despite 

reinsurance contract wording excluding the particular loss from 

coverage or for other ex gratia payments. This argument is usually 

unsuccessful because the general doctrine of follow the fortunes/ 

settlements must yield to the express terms of the reinsurance agreement, 

requiring only that the cedent make the underlying payment in 



good faith and exercise ordinary prudence. [Bellefonte Reinsurance 

Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910, 913 (2d Cir. 1990); Am. Ins. 

Co. v. N. Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 80-81 (2d Cir. 1982); 

Commercial Union Ins. Co. v. Swiss Re Am. Corp., 2003 U.S. Dist. 

LEXIS 4974, at *32-48 (D. Mass. 2003)]. Even in the absence of a follow 

the settlements provision, many cedents argue that they are invested 

with a zone of discretion to make loss payments in good faith; 

otherwise, public policies fostering settlements would be undermined 

inasmuch as the cedent might choose to litigate claims with its 

policyholder so as to avoid creating an unintended gap with its 

reinsurance recovery. 

Consider: Some reinsurance agreements include “cash call” provisions. 

Cash call clauses can provide for reinsurance payment to be made 

before, or at the same time, the ceding company makes a payment to 

its insured. 

40.13 Consider Obligation to Reimburse Insurer for Declaratory Judgment 

Expense. Declaratory judgment expenses are the expenses an insurance 

company incurs in seeking a judicial determination of its obligation to 

provide insurance coverage to its policyholder and pay claims under an 

insurance policy. These legal expenses can arise when either the insured or 

the insurer initiates a lawsuit to determine whether a claim is covered. 

Ceding insurers often seek indemnity from their reinsurers for declaratory 

judgment expenses. A reinsurer’s obligation to reimburse its cedent for 

declaratory judgment depends on the wording of the reinsurance contract, 

often its definition of “allocated loss expenses” to be paid by the reinsurer. 

The most recent reported decisions evidence a trend toward allowing 

cedents to recover declaratory judgment expenses; importantly, however, 

the reinsurance contract wording controls in all circumstances, so counsel 

must evaluate the language of the particular reinsurance agreement 

carefully. 

Example — Declaratory Judgment Expenses Recoverable: Reinsurance 

certificates providing for coverage of “expenses” incurred in the 

“investigation and settlement of claims or suits” was ambiguous; after 

consideration of evidence of custom and usage, the court found that 

the disputed language covered the declaratory judgment expenses 

sought by the cedent [Fireman’s Fund Ins. Co. v. Gen. Reinsurance 

Corp., 2005 U.S. Dist. LEXIS 43650, at *31-33 (N.D. Cal. 2005)]. 

Example — Declaratory Judgment Expenses Recoverable: There was “no 

question” that the allocated loss expense provision requiring payment 



for “all expenses incurred in the investigation and settlement of claims 

or suits” included the declaratory judgment expenses incurred by a 

reinsured attempting to avoid coverage for a claim [Employers Ins. Co. 

of Wausau v. Am. Reinsurance Co., 256 F. Supp. 2d 923, 925 (W.D. Wis. 

2003)]. A sentence in the provision stating that “allocated loss expenses 

shall not include expenses incurred by [the cedent] in regard to any 

actual or alleged liability that is not within the circumscribed provisions 

of the policy reinsured” was an exclusion of expenses relating to 

the cedent’s extracontractual or tortious (i.e., bad faith) conduct and 

was not an exclusion of declaratory judgment expenses [id.]. 

Example — Declaratory Judgment Expenses Recoverable: A reinsurance 

provision requiring reimbursement of “claim expenses,” defined as 

“all payments under the supplementary payments provision of [the 

ceding insurer’s] policy, including court costs, interest upon judgments, 

and allocated investigation, adjustment and legal expenses,” 

required payment of fees and expenses incurred in a declaratory 

judgment action [Employers Reinsurance Corp. v. Mid-Continent Cas. 

Co., 202 F. Supp. 2d 1221, 1235-36 (D. Kan. 2002), aff’d, 358 F.3d 757, 768 

(10th Cir. 2004)]. 

Example — Declaratory Judgment Expenses Recoverable: A facultative 

certificate stating that “the Reinsurer shall pay its proportion of 

expenses (other than office expenses and payments to any salaried 

employee) incurred by the [cedent] in the investigation and settlement 

of claims or suits” was ambiguous with respect to the payment of 

declaratory judgment expenses, so evidence of industry standards and 

customs was reviewed to determine contractual intent [Affiliated FM 

Ins. Co. v. Constitution Reinsurance Corp., 626 N.E.2d 878, 881-82 

(Mass. 1994). A jury reviewing evidence of reinsurance custom and 

practice determined that a “common understanding” existed between 

the parties requiring the reinsurer to indemnify the cedent for declaratory 

judgment expenses [see Affiliated FM Ins. Co. v. Constitution 

Reinsurance Corp., No. 89-2411 (Mass. Super. Ct. Sept. 24, 1998), 

reported in Mealey’s Litigation Reports: Reinsurance, Vol. 9, No. 10, at 

1]. 

Example — Declaratory Judgment Expenses Not Recoverable: Recovery 

of declaratory judgment expenses was denied where the reinsurance 

certificates included a clause stating: “[t]his Certificate of Reinsurance 

is subject to the same risks, valuations, conditions, endorsement 

(except change of location), assignments and adjustments as are or 

may be assumed, made or adopted by the reinsured, and loss, if any, 



hereunder is payable pro rata with the reinsured and at the same time 

and place” [British Int’l Ins. Co. v. Seguros La Republica, S.A., 2001 

U.S. Dist. LEXIS 11453, at *2 (S.D.N.Y. 2001)]. On appeal, the court 

rejected the reinsured’s argument that the certificates were ambiguous 

with respect to recovery of declaratory judgment expenses because the 

word “expenses” did not appear anywhere in the certificates [British 

Int’l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 82-83 (2d Cir. 

2003)]. 

� Cross References: For a discussion of the equitable and policy 

arguments advanced by cedents and reinsurers in disputes over 

reimbursement of declaratory judgment expenses, see Mitchell L. 

Lathrop, Insurance Coverage for Environmental Claims § 10.06[6]; Eric 


40.14 Consider Obligation to Reimburse Insurer for Extra-Contractual Obligations 

and Excess of Policy Limits (“ECO/XPL”) Damages. 

9 Bad Faith: As a general rule, reinsurers are required to indemnify 

ceding insurers only to the extent that the ceding insurer’s payments 

or losses are within the scope of the original policy’s terms [Am. Ins. 

Co. v. N. Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 81 (2d Cir. 1982)]. 

A reinsurer will not be held liable for payments in excess of policy 

limits (“XPL”), that is, payment for what is sometimes called “thirdparty” 

bad faith, or for the extra-contractual obligations (“ECO”) of the 

cedent, that is, payment for “first-party” bad faith, unless the reinsurance 

contract is interpreted as covering that exposure [see Reliance Ins. 

Co. v. Gen. Reinsurance Corp., 506 F. Supp. 1042, 1050 (E.D. Pa. 1980)]. 

There are differing opinions as to whether the reinsurance contract 

must cover such exposures expressly in order for the reinsurer to be 

held liable for them. 

An exception to the general rule that arises on rare occasions is when the 

reinsurer actively participates in the defense or settlement of a claim under 

the direct insurance policy. In those circumstances, a court may conclude 

that the reinsurer has acted as a “co-insurer” or joint venture, thereby 

subjecting itself to liability for losses in excess of the stated policy limits 

[see Peerless Ins. Co. v. Inland Mut. Ins. Co., 251 F.2d 696, 703-04 (4th Cir. 

1958); but see Employers Reinsurance Corp. v. Am. Fid. & Cas. Co., 196 F. 

Supp. 553, 560-61 (W.D. Mo. 1959)]. 

Cedents can secure XPL or ECO coverage by including clauses in their 

reinsurance contracts that specifically address these obligations. Most 

cedents request these provisions to address the risk that tort claims against 



their insureds will not be resolved within applicable policy limits following 

the cedent’s unreasonable failure to effect a settlement or that bad faith 

claims will be directed at the cedent’s conduct in handling the insured’s 

claim for coverage. Inclusion of XPL and ECO clauses removes the 

uncertainty as to whether such losses will be covered under the reinsurance 

contract. 

An XPL clause specifically provides coverage for losses in excess of the 

policy limits in the insurance policy issued by the cedent to its policyholder 

and typically appears in reinsurance treaties covering liability 

business. An XPL clause covers payment by a cedent arising from a 

judgment against its insured in excess of the reinsured’s policy limits, but 

otherwise covered, where the size of the judgment was affected by the 

cedent’s negligence, fraud or bad faith in handling the claim or in the 

settlement or defense of the lawsuit against the insured. The reinsurance 

contract usually limits the amount paid by a reinsurer on an XPL claim to 

an amount within the overall reinsurance limit. An XPL clause is not 

intended to cover amounts the cedent is found liable to pay directly to its 

insured as compensation or punitive damages due to its own misconduct 

to its insured, rather than indirectly on account of its failure to resolve the 

policyholder’s liability to others. [See § 40.44 for an example of an XPL 

clause included in a reinsurance treaty.] 

An ECO clause is similar to an XPL clause in that it covers the liability of 

the cedent due to mishandling or defense of claims but it focuses on the 

cedent-insurer’s obligation to act in good faith relative to its own insured. 

By definition, extra-contractual obligations incurred by the cedent are 

“extra” or outside the coverage provided by the policy. For example, ECO 

clauses can provide for indemnification of payments to an insured for 

punitive damages and emotional distress caused by the cedent’s tortious 

conduct or failing to treat the insured fairly and in good faith. [See § 40.43 

for an example of an ECO clause.] In addition, an ECO clause may be 

drafted to cover a ceding insurer’s exposure when its insured is found 

liable to a third party for punitive damages, though this may be more 

probably understood as an XPL exposure. 

t Warning: In some states, public policy concerns preclude insurance 

indemnification for punitive damages awards [see Home Ins. Co. v. 

Am. Home Prod. Corp., 550 N.E.2d 930, 932 (N.Y. 1990)]. A reinsurance 

contract including an ECO clause covering liability for bad faith 

judgments may be interpreted not to cover punitive damages in states 

where insurance for punitive damages awards is prohibited. A reinsurer 

could assert that, because the state’s public policy prohibits 

insurance for punitive damages, reinsurance for punitive damage 



awards also should be prohibited. However, a federal district court in 

Connecticut refused to vacate an arbitration award directing a reinsurer 

to reimburse its cedent for punitive damages where the reinsurance 

contracts included ECO clauses, despite Connecticut’s public 

policy against insurance for such awards. The court ruled that the 

Convention on the Recognition and Enforcement of Foreign Arbitral 

Awards, which governed the international arbitration, preempted 

Connecticut law, that the Convention looked to the public policy of the 

country in which enforcement of the arbitral award is sought and that 

the United States does not have a public policy against contractual 

indemnification of punitive damages [Hartford Fire Ins. Co. v. Lloyd’s 

Syndicate, 1997 U.S. Dist. LEXIS 10858, at *14-18 (D. Conn. 1997)]. 

Further, if a ceding insurer pays punitive damages in circumstances 

where the legality of indemnification is unsettled, a reinsurer may be 

obligated to follow the fortunes of its cedent and provide reimbursement. 

z Strategic Point: The specific language of ECO or XPL clauses can 

vary and make a significant difference in the coverage afforded. Parties 

to the reinsurance agreement should draft these provisions carefully to 

ensure appropriate coverage and to avoid disputes. 

� Cross References: For discussions of circumstances under which 

reinsurance potentially covers punitive damages, see Eric Mills 

Holmes, Appleman on Insurance 2d § 127.5; Mitchell L. Lathrop, 

Insurance Coverage for Environmental Claims, § 10.06[3]. 


VI. CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE 

FIDEI. 

40.15 Consider Insurer’s Duty to Disclose to Reinsurer All Material Facts 

About Risk Being Reinsured. The law and practice of the reinsurance 

industry recognize that the relationship between parties to a reinsurance 

agreement is characterized by “uberrimae fidei” or “utmost good faith,” 

which entails mutual trust and regard for the interest of the other party. 

Both parties to a reinsurance contract must treat each other with the 

utmost good faith in terms of disclosing all facts that are material to the 

risk reinsured and in conducting themselves in business dealings that may 

affect the other’s legal liability under the contract. Specifically, utmost 

good faith means that the maxim caveat emptor does not apply to the 

reinsurance relationship [Barry R. Ostrager and Mary Kay Vyskocil, 

Modern Reinsurance Law and Practice (2d ed. 2000) § 3.01[a], citing 

Black’s Law Dictionary 1520 (6th ed. 1990)]. 

The duty of utmost good faith arises from the recognition that the 

reinsurer does not perform all the actions that would be taken if it was 

placing original coverage, but has to rely on the cedent to do so. A 

reinsurer is not intimately involved in underwriting the ceded business or 

in handling claims subject to the reinsurance agreement; instead, the 

reinsurer is dependent upon and must be able to rely on the cedent to 

perform these functions. Although cases regarding the doctrine of utmost 

good faith focus primarily on the cedent’s duties to the reinsurer, 

particularly in terms of affirmatively disclosing material facts about the 

ceded business during the reinsurance placement process, it is a mutual 

obligation [Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 829 n.3 

(9th Cir. 1995); United Fire & Cas. Co. v. Arkwright Mut. Ins. Co., 53 F. 

Supp. 2d 632, 642 (S.D.N.Y. 1999)]. The facts and circumstances of the 

reinsurance relationship are important in determining the existence and 

scope of the duty. 

The doctrine is most often referenced in terms of the cedent’s duty to 

disclose material facts about the risk that the reinsurer is reinsuring [A/S 

Ivarans Rederei v. Puerto Rico Ports Auth., 617 F.2d 903, 905 (1st Cir. 

1980)]. A ceding company that conducts an investigation and is in 

possession of all of the details relating to the risk must exercise the utmost 

good faith in revealing all facts that materially affect the risk of which it is 

aware and of which the reinsurer has no reason to know [Christiania Gen. 

Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 278 (2d Cir. 1992)]. A cedent 

is required “to place the [reinsurance] underwriter in the same position as 

himself [and] to give to him the same means and opportunity of judging 



the value of the risks” [Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 

510 (1883)]. 

A fact will be deemed “material” if it “would have either prevented a 

reinsurer from issuing a policy or prompted a reinsurer to issue it at a 

higher premium” had it been disclosed before the reinsurance contract 

was executed [Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d. 

at 279; In re Liquidation of Union Indem. Ins. Co. of N.Y., 674 N.E.2d 313, 

320 (N.Y. 1996)]. Disclosure is required, for example, “[w]here the reinsured 

has offered extended coverage or an unusual term” [Sumitomo 

Marine & Fire Ins. Co. v. Cologne Reinsurance Co., 552 N.E.2d 139, 143 

(N.Y. 1990)]. 

The following are additional types of information that have been found to 

be material to the underwriting process: 

• The premium rate, volume or sufficiency; 

• Prior significant losses or legal actions against the insured; 

• The underwriting agent’s role; 

• The geographical spread of the underlying risks; and 

• The type of business ceded. 

The duty of utmost good faith also applies to the relationship between a 

retrocedent and its retrocessionaire [Compagnie de Reassurance D’Ile de 

France v. New England Reinsurance Corp., 57 F.3d 56, 66-70 (1st Cir. 

1995)]. 

Whether the reinsurance intermediary is an agent of the cedent or the 

reinsurer is a fact based inquiry. Under typical circumstances, the intermediary 

is the agent of the ceding company. Hence, a reinsurance 

intermediary may be held to be the agent of the ceding company in terms 

of the representations made to the reinsurer during the reinsurance 

placement process [see Old Reliable Fire Ins. Co. v. Castle Reinsurance Co., 

Ltd., 665 F.2d 239 (8th Cir. 1981); Calvert Fire Ins. Co. v. Unigard Mut. Ins. 

Co., 526 F. Supp. 623 (D. Neb. 1980)]. 

Example: The reinsurers’ defense of fraud in the inducement and 

avoidance of the reinsurance treaties was upheld where the ceding 

insurer failed to disclose its insolvency [In re the Liquidation of Union 

Indem. Ins. Co. of N.Y., 674 N.E.2d 313, 320 (N.Y. 1996)]. 

Example: Reinsurers were entitled to rescission of a reinsurance 

contract where the cedent failed to disclose the existence of unimplemented 

recommendations made as part of a survey report prepared in 



connection with the underwriting of an earlier insurance policy, and 

the reinsurers had previously informed the cedent that they considered 

compliance with the survey report recommendations to be 

material [Allendale Mut. Ins. Co. v. Excess Ins. Co., 992 F. Supp. 278, 

282-83 (S.D.N.Y. 1998)]. 

Example: Substantial evidence of material misrepresentations supported 

a jury verdict where the cedent hid from its reinsurer the 

dangerous nature of the insured’s business, misstated the insured’s 

previous loss record and did not reveal the nature of the underlying 

insurance [Sec. Mut. Cas. Co. v. Affiliated FM Ins. Co., 471 F.2d 238, 

241, 245-46 (8th Cir. 1972)]. 

Example: Where the ceding insurer had no reason to believe that its 

reinsurer would consider the direct insured’s distribution of ATV’s 

material to the nature of the risk because the insurer itself did not view 

it as such when the reinsurance contract incepted, the failure to 

disclose this information did not deprive the reinsurer of the same 

opportunity the cedent had to assess the risk, and the reinsurer’s 

misrepresentation claim was properly dismissed [Christiania Gen. Ins. 

Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992)]. 

Examples: Some courts have found that reinsurers have a duty to 

investigate the reinsurance transaction, and a failure to do so may 

provide a defense to a claim for rescission based on an omission where 

the cedent lacked the intent to deceive. For example, in rejecting 

certain claims of fraudulent inducement, the First Circuit Court of 

Appeals stated: “[w]ithout first being asked by the other party, one 

would not expect [the cedents] to volunteer a plethora of details on 

their proposed underwriting practices. Matters would have been 

different had [the cedents] affirmatively misrepresented their intended 

underwriting practices or given incomplete, evasive or incorrect 

answers to questions asked . . . .” [Compagnie De Reassurance D’lle 

de France v. New England Reinsurance Corp., 57 F.3d 56, 80 (1st Cir. 

1995); see also Old Reliable Fire Ins. Co. v. Castle Reinsurance Co., Ltd., 

665 F.2d 239, 244 (8th Cir. 1981); Unigard Sec. Ins. Co. v. Kansa Gen. 

Ins. Co., Ltd., 1992 U.S. Dist. LEXIS 20677, at *22 (W.D. Wash. Nov. 9, 

1992), aff’d 1994 U.S. App. LEXIS 35914 (9th Cir. 1994)]. 

Consider: In some states, the duty to disclose all material facts to the 

reinsurer is required by statute [see Cal. Ins. Code § 622]. 

Consider: It has been argued that a cedent’s duty to disclose informa- 



tion to its reinsurer is broader in treaty relationships as compared to 

facultative relationships. Cedents must arguably be more detailed in 

their disclosures because treaty reinsurers are unable to reject individual 

risks that fall within the class of risk covered by the treaty [see 

Barry R. Ostrager and Mary Kay Vyskocil, Modern Reinsurance Law 

and Practice § 3.03[a] (2d ed. 2000); Steven W. Thomas, Utmost Good 

Faith in Reinsurance: A Tradition in Need of Adjustment, 41 Duke L.J. 1548, 

1571 (June 1992)]. 

� Cross References: For discussions of the doctrine of utmost good 

faith and cases considering its application, see Mitchell L. Lathrop, 

Insurance Coverage for Environmental Claims §§ 10.01[4], 10.05; Eric 


40.16 Consider Application of Duty of Utmost Good Faith Beyond Disclosure 

at Inception of Reinsurance Relationship. 

40.16[1] Application of Duty of Utmost Good Faith to Parties’ Conduct 

During Life of Reinsurance Contract. The mutual duty of utmost good 

faith extends to the parties’ actions during the entire course of the 

reinsurance relationship. For example, the cedent’s duty to disclose 

all material facts is not just relevant in the contract formation stage of 

the reinsurance relationship: “[i]n fact, because the reinsurer places 

complete trust in the underwriting capability, claims-handling ability 

and general integrity of the reinsured, the reinsured owes the 

reinsurer the highest duty of fair dealing and utmost good faith 

throughout the reinsurance relationship” [New York Insurance Law 

§ 15.02 (Walcott B. Dunham, Jr., ed.). 

40.16[2] Application of Duty of Utmost Good Faith to Underwriting and 

Administration of Ongoing Business. The duty of utmost good faith 

requires the cedent to act honestly and to follow all proper and 

businesslike steps in underwriting reinsured business and in settling 

claims [Am. Marine Ins. Group v. Neptunia Ins. Co., 775 F. Supp. 703, 

705 (S.D.N.Y. 1991)]. Moreover, a cedent’s failure to act in good faith 

in handling or resolving claims may excuse the reinsurer from 

following the fortunes or settlements of the cedent [for a discussion 

of the follow the fortunes doctrine and the reinsurer’s preclusion 

from second-guessing the reinsured’s good faith claims decisions, see 

§ 40.18 below]. Many courts considering what constitutes good faith 

in the context of a ceding insurer’s payment or settlement of claims 

have concluded that negligence alone cannot establish bad faith [Am. 

Bankers Ins. v. Nw. Nat’l Ins., 198 F.3d 1332, 1336 (11th Cir. 1999); 

Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1069 (2d 



Cir. 1993)]. Instead, the appropriate standard for bad faith in these 

circumstances is deliberate deception, gross negligence or recklessness 

[Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d at 1069]. 

Example: A federal district court found that application of the 

follow the settlements doctrine is subject to the requirement that 

the cedent conduct a reasonable, businesslike investigation before 

paying a claim. The cedent’s superficial investigation of claims 

stemming from implantation of a heart valve, failure to obtain 

technical advice as to whether injury occurred during the policy 

period, and failure to secure a legal opinion as to the appropriate 

trigger of coverage were grossly negligent and relieved the 

reinsurer of the duty to follow the settlements of the cedent [Suter 

v. Gen. Accident Ins. Co., 2006 U.S. Dist. LEXIS 48209, at *84-86 

(D.N.J. 2006)]. 

Example: The Third Circuit Court of Appeals reversed the District 

Court’s finding that a ceding insurer breached its duty of good 

faith by agreeing to participate in the Wellington Agreement, 

which established an orderly mechanism for the application of 

insurance policies to underling asbestos-related bodily injury 

claims, and by failing to schedule the underlying policies according 

to the Agreement in order to avoid paying defense costs. The 

appellate court found that mere negligence could not support a 

violation of the duty, that none of the cedent’s actions amounted 

to gross negligence or recklessness and that the reinsurer did not 

prove that it had suffered the requisite separate economic injury 

(apart from its obligation to make payment under the reinsurance 

certificate) [N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 

1194, 1212-17 (3d Cir. 1995)]. 

Example: An appellate court directed the trial court on remand to 

consider whether a cedent violated its duty to act in good faith by 

failing to disclose its increased use of intermediaries to produce 

“non-system” business that was ceded under the reinsurance 

treaties and by abandoning plans set forth in the placing documents 

to establish direct relationships with insurers [Compagnie 

de Reassurance D’Ile de France v. New England Reinsurance 

Corp., 57 F.3d 56, 79-82 (1st Cir. 1995)]. 

Example: Reinsurers sufficiently alleged claims for breach of 

reinsurance contracts based on proven “irregularities” in the 

cedent’s underwriting [Int’l Ins. Co. v. Certain Underwriters at 



Lloyd’s London, 1991 U.S. Dist. LEXIS 12948, at * 18, 36 (N.D. Ill. 

1991)]. 

Example: An arbitration panel acknowledged that a cedent could 

have handled claims better but concluded that “the estimated 

savings that might have resulted from improved claims handling 

was relatively modest and well within the amount of slippage 

that would be expected under industry standards for average 

claims handling of a large book of workers’ compensation claims” 

and ordered the reinsurer to pay the claims [Superior Nat’l Ins. 

Co. v. U.S. Life Ins. Co., No. 07-01458 (C.D. Cal. Feb. 18, 2007), 

reported in Mealey’s Litigation Reports: Reinsurance, Vol. 17, No. 

21 at 4]. 

Example: A federal District Court confirmed two arbitration 

awards reducing the amount of reinsurers’ participations in 

treaties, where the cedent had made cessions to the treaties that 

were not of the type of business that it represented would be 

produced [Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance 

Co., Ltd., 1988 U.S. Dist. LEXIS 6277, at *3-7 (E.D. Pa. June 28, 

1988)]. 

40.16[3] Application of Duty of Utmost Good Faith to Obligation to Give 

Notice of Claim. Reinsurers rely on their cedents for the information 

necessary to properly assess risks. Therefore, the duty of utmost good 

faith applies to the obligation of cedents to notify reinsurers of 

potential claims where the reinsurance contract so requires [Certain 

Underwriters at Lloyd’s London v. Home Ins. Co., 783 A.2d 238, 240 

(N.H. 2001)]. In most states, a cedent’s failure to provide prompt 

notice of a claim entitles the reinsurer to refuse to perform only if the 

reinsurer was prejudiced by the untimely notice or where the cedent 

acted in bad faith [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 

F.3d 1049, 1069 (2d Cir. 1993); Certain Underwriters at Lloyd’s 

London v. Home Ins. Co., 783 A.2d at 240-41; for a discussion of the 

ceding insurer’s notice obligations and late notice as a defense to 

payment of reinsurance obligations, see § 40.09 above]. 

9 Bad Faith: Bad faith can be established by proof that the 

reinsured acted in a grossly negligent or reckless manner in 

failing to implement practices and controls to ensure proper and 

timely notice of claims to the reinsurer [see Unigard Sec. Ins. Co., 

Inc. v. N. River Ins. Co., 4 F.3d at 1069]. “[I]f a ceding insurer has 

implemented routine practices and controls to ensure notification 



to reinsurers but inadvertence causes a lapse, the insurer has not 

acted in bad faith. But if a ceding insurer does not implement 

such practices and controls, then it has willfully disregarded the 

risk to reinsurers and is guilty of gross negligence. A reinsurer, 

dependent on its ceding insurer for information, should be able to 

expect at least this level of protection” [id. at 1069-70]. 

Example: A reinsurer was relieved of its obligation to indemnify 

its reinsured where the reinsured failed to implement notification 

practices, procedures and controls, made no effort to determine 

what its duties were under the reinsurance agreement and failed 

to give timely notice of a significant claim in violation of the 

agreement’s claims control clause [Certain Underwriters at 

Lloyd’s London v. Home Ins. Co., 783 A.2d at 240-42]. 

Example: A cedent’s untimely notice of loss to its facultative 

reinsurers did not amount to bad faith where it had established a 

“coordinated and coherent policy of dealing with [asbestos] 

claims,” and the failure to provide notice to the facultative 

reinsurers was merely negligent [Unigard Sec. Ins. Co., Inc. v. N. 

River Ins. Co., 4 F.3d at 1070]. 

40.16[4] Application of Duty of Utmost Good Faith to Reinsurer to Pay 

Under Reinsurance Agreement. Most of the cases dealing with the 

reinsurer’s duty of utmost good faith to its reinsured involve 

obligations to make payments under reinsurance agreements [Arkwright 

Mut. Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 

1995 U.S. Dist. LEXIS 11, at *14-15 (S.D.N.Y. 1995); Commercial Union 

Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49, 69-70 (D. Mass. 

1998), aff’d, 217 F.3d 33 (1st Cir. 2000)]. “Utmost good faith . . . 

requires a reinsurer to indemnify its cedent for losses that are even 

arguably within the scope of the coverage reinsured, and not to 

refuse to pay merely because there may be another reasonable 

interpretation of the parties’ obligations under which the reinsurer 

could avoid payment” [United Fire & Cas. Co. v. Arkwright Mut. Ins. 

Co., 53 F. Supp. 2d 632, 642 (S.D.N.Y. 1999)]. 

Example: A reinsurer violated the duty of utmost good faith and 

unfair claims practices law by adopting a “moving target” 

strategy of seeking to achieve a commutation of all of its 

obligations to the cedent by engaging in protracted delays in 

payment of the cedent’s claim. Among other things, the reinsurer 

raised constantly shifting defenses and objections to payment and 



unreasonably questioned the cedent’s settlement allocation 

[Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 

2d at 64-65]. 

Example: A reinsurer may have acted in bad faith by exercising its 

contractual right to determine the amount of incurred loss in a 

manner designed to evade the spirit of the reinsurance contract 

and deny the cedent the benefit of its bargain. Denial of the 

cedent’s bad faith claim was reversed, as the appellate court 

found that if the reinsurer’s selection of a particular method for 

calculating the amount of incurred loss was specifically designed 

to trigger a contractual provision enabling the reinsurer to avoid 

its payment obligation it would have acted in bad faith [BJC 

Health Sys. v. Columbia Cas. Co., 478 F.3d 908, 914-16 (8th Cir. 

2007)]. 

t Warning — Reinsurers: Reinsurers may violate the duty of 

utmost good faith in other circumstances. In one case, a reinsurer 

may have breached an implied term of the reinsurance contract 

when its attorneys disclosed confidential information obtained 

from the ceding insurer by filing it in a court file accessible to the 

public without first attempting to file it under seal. A federal 

district court refused to dismiss the cedent’s claim for breach of 

contract, stating that it may be able to prove that the “customs 

and practices of the reinsurance industry include preservation of 

confidences” [Int’l Ins. Co. v. Certain Underwriters at Lloyd’s 

London, 1991 U.S. Dist. LEXIS 12911, at *5-12 (N.D. Ill. 1991)]. 

Consider: One reason for the reinsurer’s duty to exercise utmost 

good faith in its relationship with a cedent is the permission to 

examine the cedent’s records that is granted by the access to 

records provision of the reinsurance contract. The reinsurer is 

often granted intimate access to the inner workings of the cedent 

and accordingly has a higher duty to exercise good faith in its 

dealings with the reinsured. 


VII. CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE 

SETTLEMENTS. 

40.17 Understand Distinction Between Follow the Fortunes and Follow the 

Settlements. The duty of utmost good faith inherent in all reinsurance 

relationships extends beyond contract placement and includes the claimshandling 

process [for a discussion of the duty of utmost good faith, see 

§§ 40.15 and 40.16 above]. The parties’ continued good faith is manifested 

in the “follow the fortunes” and “follow the settlements” doctrines. 

“Follow the fortunes” and “follow the settlements” clauses have been 

interpreted to embody the principle that a reinsurer will indemnify its 

cedent for any losses arguably within the terms of the underlying policy, 

as long as the cedent has not acted in bad faith. The provisions operate 

primarily for the benefit of cedents, allowing them some measure of 

certainty in calculating expected reinsurance recoveries and discouraging 

reinsurers from challenging a cedent’s coverage decisions and the amount 

of any settlement. If the follow the fortunes/settlements doctrine did not 

apply, there would be no reinsurance liability unless a claim was expressly 

covered under the direct policy. If the ceding insurer settled a coverage 

dispute and the reinsurer denied liability, the coverage case likely would 

have to be tried again. 

Although many U.S. court decisions fail to distinguish between following 

fortunes and following settlements [see, e.g., Nat’l Am. Ins. Co. of Cal. v. 

Certain Underwriters at Lloyd’s, London, 93 F.3d 529, 535 n.15 (9th Cir. 

1996); N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199, 1205 

(3d Cir. 1995); Houston Cas. Co. v. Lexington Ins. Co., 2006 U.S. Dist. 

LEXIS 45027, at *9 n.8 (S.D. Tex. June 15, 2006)], there is a meaningful 

distinction between the two concepts. As one court explained: “[t]he 

’follow the fortunes’ doctrine requires reinsurers to accept a reinsured’s 

good faith decision that a particular loss is covered by the terms of the 

underlying policy, while the ’follow the settlements’ doctrine requires 

reinsurers to abide by a reinsured’s good faith decision to settle, rather 

than litigate, claims on that policy” [Commercial Union Ins. Co. v. Seven 

Provinces Ins. Co., Ltd., 9 F. Supp. 2d 49, 66 (D. Mass. 1998)]. The phrases 

are often used interchangeably, but “the term ’follow the fortunes’ more 

accurately describes the reinsurer’s obligation to follow the reinsured’s 

underwriting fortunes, whereas ’follow the settlements’ refers to the duty 

to follow the actions of the reinsured in adjusting and settling claims” [N. 

River Ins. Co. v. Employers Reinsurance Corp., 197 F. Supp. 2d 972, 978 n.1 

(S.D. Ohio 2002)]. 



t Warning: Although U.S. practice and case law tends to conflate 

follow the fortunes and follow the settlements clauses, counsel should 

not expect that other jurisdictions do not draw sharper distinctions 

between the two, especially English precedent which may govern 

reinsurance contracts or inform the thinking or approach of reinsurance 

arbitrators. 

The “follow the fortunes” doctrine requires the reinsurer to indemnify the 

cedent for all claims paid in good faith and reasonably within the coverage 

provided under the direct policy. The “follow the fortunes” obligation is 

broad, but a reinsurer’s liability is still limited to losses covered by the 

direct policy and not excluded by the reinsurance agreement. “Follow the 

fortunes” clauses do not override or alter express coverage limits in a 

reinsurance certificate, i.e., a follow the settlements provision does not 

require the reinsurer to indemnify for ex gratia payments. 

Under the “follow the settlements” doctrine, a reinsurer will be obligated 

to reimburse a cedent for a settlement or judgment paid by the cedent in 

good faith. The purpose of the “follow the settlements” doctrine is to 

prevent the reinsurer from second guessing the settlement decisions of the 

ceding company and from obtaining de novo review of judgments of the 

reinsured’s liability to its insured [N. River Ins. Co. v. CIGNA Reinsurance 

Co., 52 F.3d 1194, 1199 (3d Cir. 1995); Aetna Cas. & Sur. Co. v. Home Ins. 

Co., 882 F. Supp. 1328, 1346 (S.D.N.Y. 1995)]. Absent exceptional circumstances, 

the ceding insurer’s interpretation and application of its policy to 

the underlying claim cannot be revisited by reinsurers or the courts. 

Ceding insurers that know their settlement decisions cannot be freely 

challenged have more incentive to settle with their insureds and avoid 

costly litigation. 

Some courts have found that the duty to follow the fortunes or settlements 

of a cedent can be implied in a reinsurance contract where a “follow the 

fortunes” or “follows the settlements” clause is not expressly included, 

based on the custom and practice of the reinsurance industry [see Aetna 

Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1349 (S.D.N.Y. 1995); 

Int’l Surplus Lines Ins. Co. v. Certain Underwriters at Lloyd’s, London, 

868 F. Supp. 917, 920 (S.D. Ohio 1994)]. Other courts, however, have 

refused to imply such a duty [see Am. Ins. Co. v. Am. Re-Insurance Co., 

2006 U.S. Dist. LEXIS 95801, at *16-17 (N.D. Cal. 2006); N. River Ins. Co. v. 

Employers Reinsurance Corp., 197 F. Supp. 2d 972, 986 (S.D. Ohio 2002) 

(applying New Jersey law); cf. Affiliated F.M. Ins. Co. v. Employers 

Reinsurance Corp., 369 F. Supp. 2d 217, 227 (D.R.I. 2005)]. This issue has 

been hotly contested in recent litigation [see Am. Motorists Ins. Co. v. Am. 

Re-Insurance Co., 2007 U.S. Dist. LEXIS 41257 (N.D. Cal. 2007) (where 



cedent failed to produce evidence to support its claim that custom and 

practice in the reinsurance industry dictates that “follow the settlements” 

is implied in a reinsurance contract even absent an express provision to 

that effect, “follow the settlements” provision cannot be read into a 

certificate of facultative reinsurance contract as a matter of law)]. 

Follow the fortunes and settlement obligations also apply to a retrocessionaire 

in its agreements with a retrocedent [Am. Bankers Ins. Co. of Fla. 

v. Nw. Nat’l Ins. Co., 198 F.3d 1332 (11th Cir. 1999)]. 

Disputes frequently arise regarding the scope of the obligations of a 

reinsurer who has agreed to “follow the fortunes” or “follow the settlements” 

of a cedent. Although most disputes are resolved in reinsurance 

arbitrations, where the opinions are typically confidential, several courts 

have published decisions considering this issue. [For examples of decisions 

involving reinsurer’s obligations under “follow the fortunes” or 

“follow the settlement” provisions, see §§ 40.18 and 40.19 below]. 

Distinguish: Many facultative certificates include a “follow the form” 

provision, under which the reinsurer agrees to indemnify the cedent as 

if the reinsurance certificate adopted or incorporated the terms and 

conditions of the reinsured policy [for a discussion of “follow the 

form” clauses, see § 40.12 above]. “Follow the fortunes” and “follow 

the settlements” clauses help define the scope of the reinsurer’s 

indemnification obligation in terms of a specific loss, while a “follow 

the form” provision confirms that the reinsurer’s undertaking is in 

step with that of the cedent. As one court explained: 

“Following form simply obliges the reinsurer to indemnify the ceding 

company fully within the scope of the reinsured risk when the claim falls 

within the scope of that risk as a matter of law (subject to exclusions 

explicitly delineated within the certificate of reinsurance); the follow the 

fortunes/settlements doctrine vests in the ceding company the right to 

decide what the scope of coverage actually is when the cedent’s policy is 

subject to more than one reasonable interpretation, and to make adjustments 

and settlements in conformity with its interpretation” [Aetna Cas. 

& Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1349 (S.D.N.Y. 1995)]. 

� Cross References: For discussions of the “follow the fortunes” and 

“follow the settlements” doctrines and examples of typical clauses that 

embody these principles in reinsurance agreements, see Eric Mills 

Holmes, Appleman on Insurance 2d §§ 106.2 and 102.5[D]; Business 

Insurance Law and Practice Guide § 14.08[5]]. 

40.18 Consider Reinsurer’s Preclusion from Second-Guessing Reinsured’s 

Good Faith Claims Decisions. The “follow the fortunes” and “follow the 



settlements” doctrines preclude reinsurers from challenging cedents’ 

payments of claims and settlements that are reasonable and made in good 

faith. 

9 Bad Faith: The burden of demonstrating bad faith is high. The 

reinsurer must show that the cedent acted with gross negligence, 

recklessness or evident bad faith or demonstrate that the payment or 

settlement was not even arguably within the scope of the reinsurance 

coverage [Am. Bankers Ins. Co. of Fla. v. Nw. Nat’l Ins. Co., 198 F.3d 

1332, 1335-36 (11th Cir. 1999); Mentor Ins. Co. (U.K.) v. Norges 

Brannkasse, 996 F.2d 506, 517 (2d Cir. 1993)]. Some courts have 

determined that the duty to act in good faith obligates cedents to be 

“honest and businesslike” in the claims settlement process [Am. 

Marine Ins. Group v. Neptunia Ins. Co., 775 F. Supp. 703, 709 (S.D.N.Y. 

1991), aff’d, 961 F.2d 372 (2d Cir. 1992); Aetna Cas. & Sur. Co. v. Home 

Ins. Co., 882 F. Supp. 1328, 1347 (S.D.N.Y. 1995)]. It is difficult for 

reinsurers to avoid following cedents’ fortunes or settlements by 

proving their decisions were not made in good faith. Courts and 

arbitrators typically require some element of intentional misconduct 

rather than inadvertent error. 

Example: A reinsurer was found not liable to its reinsured for payment 

of its share of a settled claim, even though the reinsurance agreement 

contained a “follow the settlements” clause. The court concluded that 

the settled claims were not even arguably covered by the underlying 

policies and that the cedent had not conducted a reasonable, businesslike 

investigation before paying the claims [Karen L. Suter v. Gen. 

Accident Ins. Co. of Am., 2006 U.S. Dist. LEXIS 48209, at *82, 84-86 

(D.N.J. 2006)]. 

Example: The Court of Appeals for the Eleventh Circuit found that a 

reinsurer was obligated to follow the fortunes of a ceding insurer that 

made a good faith determination of coverage based on existing law, 

regardless of whether its decision was ultimately correct [Am. Bankers 

Ins. Co. of Fla. v. Nw. Nat’l Ins. Co., 198 F.3d 1332, 1336-37 (11th Cir. 

1999)]. Because there was legitimate debate at the time of payment 

about whether a large group of similar claims constituted a single 

occurrence, the ceding insurer’s decision to pay those claims on an 

aggregate basis was not grossly negligent or reckless [id.]. 

Consider: Although courts have recognized limits on the scope of the 

“follow the fortunes” and “follow the settlements” doctrines, the 

reinsurance industry largely measure their mutual relationships as if a 



particular contract included a broad follow the settlements clause. 

Most arbitration panels, heeding provisions in reinsurance contracts 

directing them to consider reinsurance agreements as “honorable 

engagements,” and not merely legal obligations, uphold these principles 

in reinsurance payment disputes. [For a discussion of honorable 

engagement language in reinsurance contracts, see § 40.24 below]. 

40.19 Consider Application of Follow the Fortunes/Follow the Settlements to 

Allocation Decisions. One of the more common issues in reinsurance 

coverage disputes is the extent to which the follow the fortunes/ 

settlements doctrine requires reinsurers to follow the cedent’s allocation 

and aggregation decisions in the case of settlements of its direct insurance 

obligations, viz., the allocation of loss to particular policy years and the 

aggregation of losses to satisfy minimum per-occurrence retentions or to 

disaggregate losses to multiply the available reinsurance policy limits. 

Allocation issues typically arise when insureds seek coverage for injuries 

to multiple parties or multiple properties under several policies spanning 

many years and the case is settled without a judicial determination as to 

how the losses should be allocated to particular policies. Cedents must 

determine how to allocate these losses among their underlying policies, 

which allocation in turn affects their reinsurers. This tension has arisen 

largely in the context of asbestos, product liability and environmental 

coverage cases. Reinsurers have often challenged cedents’ allocation 

decisions on the grounds they were incorrect or made only to maximize 

reinsurance recovery. Many courts have held that the follow the fortunes/ 

settlements doctrine applies to preclude reinsurers from avoiding liability, 

where the allocation decisions are made reasonably and in good faith as 

part of the settlement with the insured. In addition, some courts have 

regularly found that the “follow the settlements” doctrine extends to a 

cedent’s post-settlement allocation decisions, even if there is an inconsistency 

between the cedent’s allocation and its pre-settlement assessment of 

risk as long as the allocation was made in good faith and was reasonable 

[Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of Am., 419 

F.3d 181, 188-91 (2d Cir. 2005); N. River Ins. Co. v. ACE Am. Reinsurance 

Co., 361 F.3d 134, 140-41 (2d Cir. 2004)]. 

Reinsurers will still be relieved from following cedents’ settlements if the 

allocation at the direct insurance level is trumped by the specific terms of 

the reinsurance contracts. 

Example: A facultative reinsurer was bound to pay its share of the 

direct insurer’s settlement of certain products liability claims under 

the certificate’s “follow the fortunes” clause. The court interpreted the 



“follow the fortunes” clause as having the same effect in the settlement 

context as would a “follow the settlements” clause. The court determined 

that the cedent’s allocation of the settled claims to the reinsured 

policy was “at least arguably correct, and therefore . . . could not have 

been unreasonable” [Nat’l Union Fire Ins. Co. v. Am. Re-Insurance Co., 

441 F. Supp. 2d 646, 652 (S.D.N.Y. 2006)]. The court stated that the 

reinsurer’s challenges to the ceding company’s allocation decisions 

invite “exactly the type of inquiry [by the reinsurer and the court] that 

the follow-the-fortunes doctrine is intended to prevent,” and that 

permitting reinsurers to “second guess [the propriety of the cedent’s 

allocation] ’would . . .make settlement impossible and reinsurance in 

itself problematic”’ [id., citing Travelers Cas. & Sur. Co. v. Gerling 

Global Reinsurance Corp., 419 F.3d 181, 189 (2d Cir. 2005)]. 

Example: The Second Circuit Court of Appeals held that “a cedent’s 

post-settlement allocation must be deferred to under a follow-thefortunes 

clause, regardless of any pre-settlement position taken by the 

cedent, whether that position is articulated in a pre-settlement risk 

analysis or is implicit in the settlement with the underlying insured” 

[Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of 

America, 419 F.3d 181, 188 (2d Cir. 2005)]. Granting summary judgment 

to the cedent on its claim for reinsurance payment, the court 

explained that a reinsurer seeking to avoid application of follow the 

fortunes must make an “extraordinary showing of a disingenuous or 

dishonest failure” [id. at 191] and that “a cedent choosing among 

several reasonable allocation possibilities is surely not required to 

choose the allocation that minimizes its reinsurance recovery to avoid 

a finding of bad faith” [id. at 193]. 

Example: A reinsurer disputed its cedent’s allocation of non-products 

asbestos claims that differed from its pre-settlement analysis. The 

Second Circuit Court of Appeals upheld the allocation, ruling that the 

“follow the settlements” doctrine obligated the reinsurer to indemnify 

the cedent for its share of the settlement as allocated by the cedent, 

regardless of whether there was an inconsistency between the allocation 

and the reinsured’s pre-settlement assessment of risk, as long as 

the allocation met the typical “follow the settlements” requirements, 

i.e., was in good faith, reasonable and within the applicable policies [N. 

River Ins. Co. v. Ace Am. Reinsurance Co., 361 F.3d 134, 141 (2d Cir. 

2004)]. The court explained that “[r]equiring post-settlement allocation 

to match pre-settlement analyses would permit a reinsurer, and 

require the courts, to intensely scrutinize the specific factual information 

informing settlement negotiations and would undermine the 



certainty that the general application of the doctrine to settlement 

decisions creates” [id.]. 

Example: The New York Court of Appeals rejected a cedent’s argument 

that “follow the fortunes” clauses in reinsurance treaties permitted it 

to recover under a single occurrence theory, where the language of the 

treaties did not support such allocation [Travelers Cas. and Sur. Co. v. 

Certain Underwriters at Lloyd’s of London, 760 N.E.2d 319, 327-29 

(N.Y. 2001)]. The court determined that the treaties’ definition of 

“disaster and/or casualty” as “resulting from a series of accidents, 

occurrences and/or causative incidents” incorporated spatial boundaries 

and precluded aggregation of environmental losses that occurred 

at various sites across the country [id. at 326-27]. The court emphasized 

that the “follow the fortunes” clause could not override the specific 

language of the reinsurance contracts [id. at 328]. 

Example: A federal district court denied a cedent’s motion for summary 

judgment on its claim for indemnity from its reinsurer premised 

on a “follow the settlements” provision in facultative certificates, 

where there were facts that could support the inference that the 

cedent’s conduct in allocating environmental liability to only one site 

was grossly negligent or reckless. The cedent’s classification of the 

settlement as a single occurrence, where there were claims from over 

50 different sites, may have been motivated by its desire to maximize 

reinsurance recovery and was done without following the customary 

practice of consulting an environmental expert [Hartford Accident & 

Indem. Co. v. Columbia Cas. Co., 98 F. Supp. 2d 251, 258-60 (D. Conn. 

2000)]. 

Example: The Appellate Division of the New York Supreme Court 

reversed the trial court’s grant of summary judgment to the cedent, 

which was premised on the “follow the fortunes” doctrine. During an 

insurance coverage dispute, the cedent took the position with its 

insured that damage allegedly sustained due to environmental pollution 

at various sites constituted multiple occurrences at each individual 

site. In a trial of one site at issue, the court found that one of the 

individual sites constituted seven occurrences. In the subsequent 

settlement of 16 additional sites, the cedent took the position that there 

were 95 occurrences in all; however, when it came time to cede its 

losses under facultative reinsurance agreements, the cedent took the 

position that each site constituted a single occurrence. Had the cedent 

billed the losses based on the same number of occurrences determined 

in the underlying coverage action, there would have been no reinsur- 



ance recovery because no single occurrence would have breached the 

reinsurance retention. The trial court granted the cedent summary 

judgment regardless of the inconsistency between the pre and post 

settlement allocation positions declaring that to do otherwise would 

require it to engage in an “intrusive factual inquiry” into the cedent’s 

settlement process. The Appellate Division reversed this decision 

finding that “[a] reinsurer is not bound by the follow-the-fortunes 

doctrine where the reinsured’s settlement allocation, at odds with its 

allocation of the loss with its insured, designed to minimize its loss, 

reflects an effort to maximize unreasonably the amount of collectible 

reinsurance.” Allstate Ins. Co. v. Am. Home Assurance Co., N.Y. Slip 

Op. 05170 (N.Y. App. Div., 1st Dept., June 12, 2007). 

Consider: Most allocation disputes are decided in arbitration, rather 

than litigation, and it is uncertain whether or to what extent court 

decisions on this issue are truly representative of industry practice or 

will be followed and applied in the arbitral arena. 

z Strategic Point — Cedents: The following factors may influence what 

allocation position a cedent should take in seeking indemnification 

from reinsurers: 

1. Whether the positions taken by the cedent when negotiating or 

litigating with the insured are consistent with positions advanced 

by the company in the past; 

2. Whether an underlying allocation is consistent with applicable 

state law; 

3. If there is an environmental cession, whether the liability has 

been apportioned to the various underlying sites in proportion 

to estimates developed by environmental consultants with 

respect to damages attributable to the individual sites; 

4. Whether there are annualization of limits issues; 

5. Whether more than a single occurrence limit has been paid to 

the insured to settle the liability; 

6. Whether the settlement is a policy buy-back, and if so whether 

any of the settlement amount should be allocated to known 

and/or unknown future claims (or to bad faith). 


VIII. CONSIDERING BROKERED MARKET. 

40.20 Brokered vs. Direct Market. Reinsurance companies are generally 

known as either direct markets or brokered markets, depending on 

whether the reinsurers deal directly with their cedents or deal with them 

through an intermediary. Direct markets operate through salaried employees 

of ceding insurers and reinsurers who negotiate and bind reinsurance 

contracts. In brokered markets, reinsurers assume business by dealing 

with brokers or intermediaries. Whether the intermediary is the agent of 

the cedent or the reinsurer or is a dual agent is determined by an 

application of the facts to standard agency principles. Under typical fact 

patterns, although the intermediary commission is generally paid by the 

reinsurer, the intermediary is held to be the agent of the cedent [In re 

Pritchard & Baird, Inc., 8 B.R. 265 (D.N.J. 1980)]. 

Reinsurance brokers perform many of the same functions as brokers in the 

direct insurance market. Reinsurance brokers try to secure the most 

advantageous terms for ceding insurers from the reinsurance marketplace. 

A reinsurance broker or intermediary also may perform administrative 

functions during the operation of the reinsurance agreement. Reinsurance 

intermediaries often serve as a conduits for communications between 

cedents and reinsurers, transmit payments, collect sums due, settle losses 

and prepare periodic statements of account. Reinsurance brokers may 

have functions akin to claim handlers in the gathering of information, 

conveyance of attorney advice and the like concerning the submission of 

claims for indemnification. Additional responsibilities may include drafting 

reinsurance contract wording and creating complex reinsurance 

programs tailored to the ceding insurer’s specific needs. 

z Strategic Point — Cedent: Although a reinsurance intermediary’s 

duties may be limited by specific instructions from the ceding insurer, 

it is generally required to fulfill its client’s reinsurance needs with 

reasonable care. For example, there is case law which suggests that a 

reinsurance broker has a duty to determine whether the reinsurance 

company the broker is recommending is financially solvent [Master 

Plumbers Ltd. Mut. Liab. Co. v. Cormany & Bird, Inc., 255 N.W.2d 533, 

535-36 (Wis. 1977)]. This requirement exists as of the time the broker 

issues the policy [see Cherokee Ins. Co. v. E.W. Blanch Co., 66 F.3d 117, 

123 (6th Cir. 1995)]. In analyzing potential liability, courts have stated 

that the broker must conduct a diligent inquiry that is consistent with 

industry standards [id.]. In addition, many states have enacted statutory 

schemes similar to the National Association of Insurance Commissioners 

(NAIC) Reinsurance Intermediary Model Act (“NAIC 



Model Act”), requiring special licensing for reinsurance intermediaries 

[see Cal. Ins. Code §§ 1781.1 to 1781.13; 215 Ill. Comp. Stat. 100/1 to 

100/60; N.Y. Ins. Law § 2100 et seq.]. The NAIC Model Act is republished 

in full at Eric Mills Holmes, Appleman on Insurance 2d § 104.3. 

In New York, regulations require intermediaries to inquire into the 

financial status of unauthorized reinsurers, disclose any findings to the 

cedent and provide a copy of the reinsurer’s most recent financial 

statement [N.Y. Comp. Codes R. & Regs. tit. 11, § 32.1(c); for a 

discussion of the regulation of reinsurance intermediaries in New 

York, see New York Insurance Law § 15.04[3] (Walcott B. Dunham, Jr., 

ed.)]. 

z Strategic Point — Cedents: A broker also can be liable for breach of an 

obligation to procure reinsurance for an insurer [see Nw. Nat’l Ins. Co. 

v. Marsh & McLennan, 817 F. Supp. 1424, 1430-34 (E.D. Wis. 1993)]. 

Similarly, a reinsurance intermediary may be liable for failure to 

inform the cedent that reinsurance coverage was not obtained in full or 

in part or is inferior to that which was expected [see Commonwealth 

Ins. Co. v. Thomas A. Greene & Co., Inc., 709 F. Supp. 86, 88 (S.D.N.Y. 

1989); La. Home Builders Ass’n Self-Insurers’ Fund v. Adjustco, Inc., 

633 So. 2d 630, 635-36 (La. Ct. App. 1993)]. 

� Cross Reference: For a discussion of direct and brokered reinsurance 

markets, see California Insurance Law & Practice § 11.01. 

40.21 Understand Which Entity Broker Represents. The issue often arises as 

to whose agent the reinsurance broker or intermediary is with respect to 

a specific transaction. The general rule is that the broker or intermediary 

is the agent of the ceding company, unless there are facts demonstrating 

otherwise [Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 

51 F. Supp. 2d 789, 799-800 (S.D. Tex. 1999); Banco Ficohsa v. Aseguradora 

Hondurena, S.A., 937 So. 2d 161, 165 (Fla. Dist. Ct. App. 2006)]. Under 

applicable state law principles of agency law, the specific conduct and 

relationship of the parties determines the nature and extent of agency 

status, and the most critical factor is control [St. Paul Fire and Marine Ins. 

Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS 8916, at *18-19 (S.D.N.Y. 1997)]. 

Where the broker or intermediary is found to be an agent of the cedent, the 

cedent may be responsible for the agent’s actions, including misrepresentations 

[see Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 

51 F. Supp. 2d 789, 802-05 (S.D. Tex. 1999); Reliance Ins. Co. v. Certain 

Member Companies, 886 F. Supp. 1147, 1152-55 (S.D.N.Y. 1995); Calvert 

Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 638-39 (D. Neb. 

1980)]. 



It is also possible for a reinsurance intermediary to be a dual agent [see 

Capitol Indem. Corp. v. Smith Intermediaries, Inc. 593 N.E.2d 872, 876 (Ill. 

App. Ct. 1992); Paul M. Hummer, Reinsurance Intermediaries: When Are They 

Liable and To Whom?, Mealey’s Litigation Reports § Commentary; Vol. 7, 

No. 10 (Sept. 25, 1996)]. 

Example: A reinsurance broker or intermediary may serve as the agent 

for the reinsurer in order to receive or transmit money. In that case, 

payment of a premium to the ceding insurer’s agent is likely to 

constitute a valid premium payment on the reinsurance contract, 

whether or not the reinsurer knows of the payment [see Arkwright- 

Boston Mfrs. Mut. Ins. Co. v. Calvert Fire Ins. Co., 887 F.2d 437, 440 (2d 

Cir. 1989)]. 

That an intermediary functions as an agent for one party for part of the 

transaction, and the other party for a different part, does not mean that the 

intermediary is the agent of both for all purposes. 

Most reinsurance agreements include an intermediary clause that sets 

forth the intermediary’s role in communications and its agency status in 

terms of receiving monies due between the parties. In most jurisdictions, 

a reinsurer will receive statutory credit for reinsurance only if the 

reinsurance agreement provides for the reinsurer to assume the credit risk 

of the intermediary (i.e., the reinsurer is not permitted to refuse to perform 

simply because the intermediary failed to transmit premium payments 

from the cedent). Therefore, reinsurance agreements involving intermediaries 

include an intermediary clause providing that the intermediary acts 

as the agent of the reinsurer, and not as the agent of the cedent, with 

respect to transmission of payments. [For a sample intermediary clause 

transferring the credit risk to the reinsurer, see § 40.44 below.] 

On rare occasions, a non-signatory to the arbitration agreement such as a 

reinsurance intermediary may become a party to a reinsurance arbitration. 

[For a discussion of the inclusion of non-signatories in reinsurance 

arbitrations, see § 40.22 below.] There are conflicting decisions on whether 

pre-hearing discovery can be compelled from an intermediary that is not 

a party to a reinsurance arbitration, especially whether pre-hearing 

deposition examination is available. [For a discussion of discovery in 

reinsurance arbitrations, see § 40.25 below.] 

Example: Court found that there was no agency relationship between 

a broker and a ceding insurer where the broker was not acting with the 

knowledge and consent or under the control of the ceding insurer [St. 

Paul Fire and Marine Ins. Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS 

8916, at *14 (S.D.N.Y. 997)]. The court stated “[a]lthough in most cases 



the primary insurer is the principal and the reinsurance broker its 

agent, the cases do not establish this relationship as a matter of law” 

[id. at *5]. 

Example: An employee of the cedent who erroneously ceded a risk to 

a treaty was acting as an agent of the ceding company and not of the 

reinsurers. The fact that the reinsurers knew of and were satisfied with 

his underwriting did not establish the element of control necessary to 

the agency relationship [Aetna v. Glens Falls, 453 F.2d 687, 690-91 (5th 

Cir. 1972)]. 

Example: A reinsurance treaty was rescinded because of misrepresentations 

by the intermediary, who was found to have been acting as the 

agent of the cedent [Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 

F. Supp. 623, 633 (D. Neb. 1980)]. 

Example: A reinsurance broker was the ceding insurer’s agent, and its 

misrepresentation of the underlying policy’s terms was made within 

the scope of its actual authority and voided the reinsurance policy 

[Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F. 

Supp. 2d 789, 799-805 (S.D. Tex. 1999)]. 

Example: The insurer entered into a general agency agreement with a 

company which was also “an intermediary with Lloyd’s” [Brougher 

Agency, Inc. v. United Home Life Ins. Co., 622 N.E.2d 1013, 1015 (Ind. 

Ct. App. 1993)]. This agent negotiated the purchase of reinsurance 

from Underwriters at Lloyd’s, London. In a reinsurance coverage 

dispute between the insurer and the Lloyd’s Underwriters, the insurer 

argued that the underwriters were bound by the agent’s statements 

about coverage during the placement process. An arbitration panel 

rejected this claim, determining that the agent had only “ministerial” 

authority relating to the reinsurance and no binding authority on 

behalf of Lloyd’s Underwriters. Because the agent was not authorized 

to act as the agent for Lloyd’s Underwriters, they could not be liable 

for any alleged fraud by the intermediary [id. at 1016-17]. 

� Cross Reference: For a discussion of cases considering the agency 

status of reinsurance brokers and intermediaries, see Bertram Harnett, 

Responsibilities of Insurance Agents and Brokers § 2.10[7]. 


IX. CONSIDERING REINSURANCE ARBITRATION. 

40.22 Consider Obligation to Arbitrate. Most reinsurance treaties include a 

clause providing for resolution of disputes through arbitration, and U.S. 

courts strongly favor the enforcement of arbitration provisions. Even in 

the absence of an arbitration provision, the parties to a reinsurance 

contract may agree after the fact to arbitrate a particular dispute. One 

advantage of arbitration is that it enables parties to a reinsurance 

agreement to have their disputes adjudicated by a tribunal that is 

knowledgeable about the reinsurance industry; arbitrators may also be 

free to eschew fidelity to strict rules of law pursuant to “honorable 

engagement” clauses. 

The Federal Arbitration Act (“FAA”) [9 U.S.C. §§ 1 et seq.], which applies 

to arbitrations arising from transactions that affect interstate or international 

commerce, is the primary source of arbitration law in the U.S. and 

“enunciates a liberal policy in favor of arbitration” [Argonaut Ins. Co. v. 

Travelers Ins. Co., 744 N.Y.S.2d 24, 25 (N.Y. App. Div. 2002); see also 

Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional de Venez., 991 

F.2d 42, 45 (2d Cir. 1993)]. The FAA includes provisions concerning the 

following: compelling a party to arbitrate; staying litigation pending 

arbitration; appointing an arbitrator if the agreement does not so provide; 

submitting motions before courts; subpoenaing arbitration witnesses; and 

listing grounds and procedures for confirmation, vacatur, and modification 

of arbitral awards [9 U.S.C. §§ 3-16]. 

Another body of law governing and favoring commercial arbitration in 

the U.S. is the Convention on the Recognition and Enforcement of Foreign 

Arbitral Awards (the “New York Convention”) [9 U.S.C. §§ 201-208], 

which applies to arbitrations arising from commercial transactions where 

at least one party is not a U.S. citizen or where the arbitration has some 

“reasonable relation with one or more foreign states,” even if all parties are 

U.S. citizens [9 U.S.C. § 202]. State arbitration statutes, many of which are 

modeled after the Uniform Arbitration Act, generally apply to disputes 

that do not affect interstate or international commerce. 

When one party tries to avoid arbitrating a dispute, the other party may 

file a motion to compel arbitration (which is in its nature a request for 

specific performance of the arbitration clause). Whether a claim is arbitrable 

is a legal question for a court to decide, unless there is “clear and 

unmistakable” evidence that the parties have agreed to arbitrate arbitrability 

[First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944(1995), citing 

AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 649 

(1986); see also Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d 



Cir. 2005) (citation omitted)]. Although arbitration is favored by the courts, 

it will not be ordered unless the parties have agreed to arbitrate their 

dispute [Ace Capital Re: Overseas Ltd v. Central United Life Ins. Co., 307 

F.3d 24, 29 (2d Cir. 2002)]. There must be “clear and unmistakable” 

evidence of an agreement to arbitrate [First Options of Chi., Inc. v. Kaplan, 

514 U.S. 938, 947 (1995)], although most courts seem, as a practical matter, 

to rule in favor of arbitrability or to remand the question of arbitrability to 

arbitrators — either way referring a particular matter to arbitration. In 

addition, the duty to arbitrate is limited by “the scope of the particular 

arbitration clause to which the parties have agreed,” so certain types of 

disputes, such as tortious interference or bad faith, might be found to be 

outside the scope of an arbitration clause governing contractual performance 

[Argonaut Ins. Co. v. Travelers Ins. Co., 744 N.Y.S.2d 24, 25 (N.Y. 

App. Div. 2002)]. 

The arbitration clause in a reinsurance contract typically sets forth the 

following: the types of disputes subject to arbitration; the initiation of the 

arbitration process; the process of selecting the arbitration panel and the 

qualifications of arbitrators; the place and time of the arbitration hearing; 

the governing law; the procedures and timeframes to be followed in the 

arbitral process; and enforcement of the arbitration award. Arbitrations 

can be conducted under many different rules and in various fora. Some 

reinsurance arbitrations are conducted pursuant to procedures set forth by 

the following organizations: 

• The American Arbitration Organization; 

• The International Chamber of Commerce; 

• The Reinsurance Association of America; 

• ARIAS-U.S.; 

• The Insurance and Reinsurance Dispute Resolution Task Force; and 

• The International Institute for Conflict Prevention and Resolution. 

The presumption favoring arbitrability of a particular dispute is strengthened 

when the language in the arbitration clause defining arbitrable 

disputes is “broad” [Leadertex, Inc. v. Morganton Dyeing & Finishing 

Corp., 67 F.3d 20, 27 (2d Cir. 1995)]. The following are examples of 

language included in arbitration clauses that have been viewed as broad 

and encompassing a variety of disputes beyond interpretation of the 

contract: 

• Any dispute, controversy or claim arising in connection with the 

performance or breach of the agreement; 

• Any controversy, claim or dispute between the parties arising out 



of or relating in any way to the agreement; 

• Any dispute arising from the making, performance or termination 

of the contract; 

• All claims and disputes of whatever nature arising under the 

contract; and 

• Any dispute between the parties to the agreement over the terms of 

the agreement or any claim of breach by either of the parties. 

� Cross Reference: For an example of a broad arbitration clause in a 

reinsurance agreement, see § 40.45 below. 

In contrast, included below are examples of language in arbitration 

clauses that have been viewed as narrow, limiting arbitration to particular 

types of disputes: 

• All disputes or differences arising out of the interpretation of the 

agreement; 

• Any matter involving the interpretation or application of the 

agreement; 

• An irreconcilable difference of opinion as to the interpretation of 

the contract. 

Parties are free to limit by agreement the claims they wish to arbitrate, 

requiring the “federal policy favoring arbitration [to] yield” to the parties’ 

agreement [Hartford Accident and Indem. Co. v. Swiss Reinsurance Am. 

Corp., 246 F.3d 219, 223 (2d Cir. 2001) (citation omitted); see also Ace 

Capital Re: Overseas Ltd v. Central United Life Ins. Co., 307 F.3d 24, 29 (2d 

Cir. 2002)]. 

In determining whether a particular dispute is arbitrable, courts typically 

engage in a two-part inquiry: whether there is an agreement to arbitrate 

and, if so, whether the scope of the agreement encompasses the asserted 

claims [Hartford Accident and Indem. Co. v. Swiss Reinsurance America 

Corp., 246 F.3d 219, 226 (2d Cir. 2001) (citation omitted)]. “[A]ny doubts 

concerning the scope of arbitrable issues should be resolved in favor of 

arbitration” [Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 

U.S. 1, 24-25 (1983)]. Therefore, a court should compel arbitration “unless 

it may be said with positive assurance that the arbitration clause is not 

susceptible of an interpretation that covers the asserted dispute” [David L. 

Threlkeld & Co., Inc. v. Metallgesellschaft Ltd., 923 F.2d 245, 250 (2d Cir. 

1991) (citations omitted)]. In determining whether a particular claim falls 

within the scope of an arbitration agreement, courts focus on the factual 

allegations rather than the legal claims asserted. If the allegations under- 



lying the claims “touch matters” covered by the parties’ contract, then 

those claims are arbitrable [see Mitsubishi Motors Corp. v. Soler Chrysler- 

Plymouth Inc., 473 U.S. 614, 625 n.13 (1985); Genesco, Inc. v. Kakiuchi & 

Co., Ltd., 815 F.2d 840 (2d Cir. 1987)]. Appellate courts review decisions to 

compel arbitration de novo [Sphere Drake Ins. Ltd. v. Clarendon Nat’l Ins. 

Co., 263 F.3d 26, 29 (2d Cir. 2001)], but such review may not be available 

on an interlocutory basis. 

Courts can sever arbitrable claims from nonarbitrable claims. When a 

court determines that only some claims are arbitrable, it must decide 

whether to stay litigation of the remaining claims pending arbitration or to 

let them proceed concurrently [JLM Industries, Inc. v. Stolt-Nielsen SA, 

387 F.3d 163, 169 (2d Cir. 2004) (citation omitted); Benson v. Lehman Bros., 

Inc., 2005 U.S. Dist. LEXIS 8542, at *4-5 (S.D.N.Y. May 9, 2005) (citation 

omitted)]. [For a discussion of when courts stay litigation pending 

arbitration, see New York Insurance Law, § 15.08[2] (Walcott B. Dunham, 

Jr., ed.).] If factual questions on which the non-arbitrable claim turns may 

be resolved in the arbitration, courts typically stay the non-arbitrable 

claim. 

Absent a contract provision to the contrary, questions of mere delay, laches 

and untimeliness raised to defeat arbitration are generally issues of 

procedural arbitrability reserved for resolution by the arbitrator [Glass v. 

Kidder, Peabody & Co., Inc., 114 F.3d 446, 454-56 (4th Cir. 1997); All Am. 

Termite & Pest Control, Inc. v. Albert Bedford Walker, 830 So. 2d 736, 739 

(Ala. 2002); Amtower v. William C. Roney & Co., 590 N.W.2d 580, 583 

(Mich. Ct. App. 1998); but see In the Manner of Donaldson Acoustics, Inc. 

v. N.Y. Inst. of Tech., 671 N.Y.S.2d 114, 115 (N.Y. Sup. Ct. 1998)]. 

Another issue that most courts have found to be within the purview of the 

arbitration panel, unless the parties’ agreement provides otherwise, is 

whether or not arbitrable disputes can be consolidated, that is, whether 

arbitration under separate contracts can be resolved in a single proceeding 

[Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 581 

(7th Cir. 2006); Shaw’s Supermarkets, Inc. v. United Food & Commercial 

Workers Union, 321 F.3d 251, 254-55 (1st Cir. 2003); Markel Int’l Ins. Co. v. 

Westchester Fire Ins. Co., 442 F. Supp. 2d 200, 203-05 (D.N.J. 2006), aff’d 

Certain Underwriters at Lloyd’s London. v. Westchester Fire Ins. Co., 2007 

U.S. App. LEXIS 13714 (3d Cir. 2007)]. 

z Strategic Point — Consolidation of Arbitrations: There are potential 

advantages and disadvantages posed by the consolidation of arbitration 

proceedings. On the one hand, consolidation may prevent inconsistent 

and conflicting decisions, provide arbitrators with a more 

complete understanding of the issues involved in the disputes and 



promote more efficient and cost-effective dispute resolution. On the 

other hand, consolidation may be more costly for a party only 

peripherally involved in a series of complex disputes, may create a risk 

that the panel’s decision will be tainted by facts irrelevant to a 

particular dispute and may raise additional confidentiality concerns. It 

also may be difficult to restructure an arbitration proceeding to 

accommodate the rights of additional parties or related disputes. Thus, 

contracting parties should carefully consider whether or not to include 

consolidation and joinder provisions in their arbitration agreements or 

to request consolidation once arbitration has commenced. Parties 

seeking consolidation should approach their arbitration panel quickly 

to ensure that the decision regarding consolidation will be made by the 

panel they chose, and not a panel adjudicating another dispute. 

Some parties have argued that inclusion of a service of suit clause in a 

reinsurance agreement conflicts with an arbitration clause in the same 

agreement and indicates that the parties did not intend all issues to be 

arbitrable. Most courts have harmonized these clauses, however, by 

assuming that the parties did not intend to eviscerate the arbitration 

clause through the service of suit clause [see Montauk Oil Transp. Corp. v. 

Steamship Mut. Underwriting Ass’n (Bermuda), 79 F.3d 295, 298 (2d Cir. 

1996); Ochsner/Sisters of Charity Health Plan, Inc. v. Certain Underwriters 

at Lloyd’s, London, 1996 U.S. Dist. LEXIS 12561, at *5-7 (E.D. La. Aug. 

30, 1996); W. Shore Pipe Line Co. v. Associated Elec & Gas Ins. Servs., Ltd., 

791 F. Supp. 200, 204 (N.D. Ill. 1992)]. Courts have found that the service 

of suit clause is intended to provide jurisdiction over a foreign party, and 

where it co-exists with an arbitration clause, its purpose is to permit 

enforcement of an arbitration decision or to allow a petition to compel 

arbitration to be adjudicated in a particular court [W. Shore Pipe Line Co. 

v. Associated Elec. & Gas Ins. Servs., Ltd., 791 F. Supp. 200, 204 (N.D. Ill. 

1992)]. 

The arbitration clause is also the starting point for a determination of the 

remedies that can be imposed by an arbitral panel. “[S]ubject to the terms 

of the empowering clause, arbitrators possess latitude in crafting remedies 

as wide as that which they possess in deciding cases” [Advest, Inc. v. 

McCarthy, 914 F.2d 6, 10-11 (1st Cir. 1990)], including equitable remedies 

such as pre-judgment attachment or security. Consistent with the federal 

policy favoring arbitration, courts have been reluctant to find that an 

arbitrator exceeded his authority in ordering relief, where the arbitration 

agreement does not specifically restrict the arbitrator’s authority [Mich. 

Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 831 (9th Cir. 1995); 

Rhone-Poulenc, Inc. v. Gould Elecs., Inc., 1998 U.S. Dist. LEXIS 15848, at *7 

(N.D. Cal. Oct. 6, 1998)]. For example, under a broadly worded arbitration 



clause, arbitrators are empowered to reform a contract [Mut. Fire, Marine 

& Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir. 1989); 

Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832-33 (9th Cir. 

1995)]. Assuming the arbitration clause is broad enough, arbitrators also 

can grant rescission of a reinsurance contract (in part because arbitration 

clauses are generally thought to be separable from the underlying 

contract) [Ace Capital Re Overseas Ltd. v. Central United Life Ins. Co., 307 

F.3d 24, 26, 33 (2d Cir. 2002)]. In some circumstances, arbitrators can award 

temporary equitable relief where necessary to ensure that the final award 

is meaningful [Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 

935 F.2d 1019, 1022-23, 1026 (9th Cir. 1991); British Ins. Co. of Cayman v. 

Water St. Ins. Co., 93 F. Supp. 2d 506, 516 (S.D.N.Y. 2000); but see Recyclers 

Ins. Group v. Ins. Co. of N. Am., 1992 U.S. Dist. LEXIS 8731, at *14 (E.D. Pa. 

1992]. Arbitrators also generally are empowered to award prejudgment 

interest [Rhone-Poulenc, Inc. v. Gould Elecs., Inc., 1998 U.S. Dist. LEXIS 

15848, at *7-8 (N.D. Cal. 1998); J.A. Jones Constr. Co. v. Flakt, Inc., 731 F. 

Supp. 1061, 1064 (N.D. Ga. 1990)]. 

Courts also may look to the parties’ submissions of the issues to the 

arbitrators to determine the scope of the arbitrators’ power to grant relief 

[Trade & Transp., Inc. v. Natural Petroleum Charterers, Inc., 931 F.2d 191, 

195 (2d Cir. 1991); Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance 

Co., 868 F.2d 52, 56 (3d Cir. 1989)]. Further, the power to grant relief 

may not be limited by the scope of the parties’ agreement, if the 

background rules governing the arbitration provide broad equity powers 

[see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991); Brown 

v. Coleman Co., 220 F.3d 1180, 1183 (10th Cir. 2000)]. 

The attempted inclusion of non-signatories to the arbitration agreement in 

an arbitration proceeding is frequently a subject of dispute. Because 

arbitration is a contractual right, non-signatories to an arbitration agreement 

generally may not be bound to, nor able to, enforce an agreement to 

arbitrate [Mut. Benefit Life Ins. Co. v. Zimmerman, 783 F. Supp. 853, 865-67 

(D.N.J. 1992)]. However, in certain circumstances, a non-signatory may 

force a signatory to an arbitration agreement to submit to an arbitration 

with the non-signatory under principles of contract, agency and estoppel 

[see Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 

F.2d 836, 838-41 (7th Cir. 1981); Gulf Guar. Life Ins. Co. v. Conn. Gen. Life 

Ins. Co., 957 F. Supp. 839, 841-42 (S.D. Miss. 1997); Cont’l Cas. Co. v. 

Certain Underwriters at Lloyd’s London, 2004 U.S. Dist. LEXIS 4060, at 

*13-14 (S.D.N.Y. 2004)]. In addition, non-signatories to an arbitration 

agreement may be bound to arbitrate pursuant to several legal doctrines, 

including: assumption; agency; estoppel; veil piercing; and incorporation 

by reference [Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen 



GMBH, 206 F.2d 411, 416-18 (4th Cir. 2000); Thomson-CSF, S.A. v. Am. 

Arbitration Ass’n, 64 F.3d 773, 776 (2d Cir. 1995); but see Grundstad v. Ritt, 

106 F.3d 201, 204-05 (7th Cir. 1997)]. 

The right to arbitrate a dispute may be waived if a party fails to comply 

with the terms of the arbitration agreement, excessively delays commencing 

arbitration or takes action that is inconsistent with the arbitral process 

[see Gen. Star Nat’l Ins. Co. v. Administratia Asigurarilor De Stat, 289 F.3d 

434, 438 (6th Cir. 2002); Menorah Ins. Co. v. INX Reinsurance Corp., 72 F.3d 

218, 221-22 (1st Cir. 1995); Kramer v. Hammond, 943 F.2d 176, 179-80 (2d 

Cir. 1991)]. If a party waits while a matter is being litigated to assert a right 

to arbitrate, the court may find it to be estopped from asserting the 

arbitration clause if the litigation has proceeded substantially. 

Example: Some courts have found that inclusion of the phrase “arbitration 

clause” in an executed placement slip or cover note constitutes 

evidence of a binding agreement to arbitrate [Zurich Am. Ins. Co. v. 

Cebcor Serv. Corp., 2003 U.S. Dist. LEXIS 10346, at *6-11 (N.D. Ill. 

2003); Guarantee Trust Life Ins. Co. v. Am. United Life Ins. Co., 2003 

U.S. Dist. LEXIS 22777, at *7-8 (N.D. Ill. Dec. 18, 2003) (applying 

Pennsylvania law); but see Frank B. Hall Co. of Colo. v. Colo. Sch. Dists. 

Self-Insurance Pool, No. 92 CV 225 (Colo. Dist. Ct., City and Co. of 

Denver Mar. 26, 1997), reported in Mealey’s Litigation Reports: Reinsurance, 

Vol. 3, No. 24 at D]. 

Example: A narrow arbitration clause applying only to “irreconcilable 

differences of opinion” that concern “the interpretation” of facultative 

certificates did not encompass a claim that the certificates were void ab 

initio because of the cedent’s failure to disclose asbestos litigation 

[Gerling Global Reinsurance Co. v. Ace Prop. & Cas. Ins. Co., 2002 U.S. 

App. LEXIS 15571, at *5-7 (2d Cir. Aug. 1, 2002) (unpublished 

opinion)]. 

Example: A reinsurer sued to rescind a reinsurance contract based on 

non-disclosures in the underwriting process. The federal district court 

found that the arbitration clause covering “[a]ll disputes or differences 

arising out of the interpretation of this Agreement” was too narrow to 

encompass claims for rescission based on misrepresentation and 

refused to stay those claims in favor of arbitration [Farm Bureau Mut. 

Ins. Co. v. Am. Int’l Group, Inc., 2003 U.S. Dist. LEXIS 14463, at *11-12 

(S.D. Iowa 2004)]. 

Example: Under an arbitration clause providing that “any dispute or 

difference of opinion hereafter arising with respect to this Contract . . . 



shall be submitted to arbitration,” the issue of a mutually agreeable 

location for the underlying dispute is arbitrable [Trustmark Ins. Co. v. 

Fire & Cas. Ins. Co. of Conn., 2002 U.S. Dist. LEXIS 7923, at *6-7 (N.D. 

Ill. 2002)]. 

t Warning: A Missouri arbitration statute has been interpreted by a 

federal district court to preclude the enforcement of arbitration clauses 

in insurance and reinsurance agreements [Transit Cas. Co. v. Certain 

Underwriters at Lloyd’s of London, 1996 U.S. Dist. LEXIS 22710, at *5-8 

(W.D. Mo. 1996), citing Mo. Rev. Stat. § 435.350 (as then existing)]. 

Examples — Non-signatories: A non-signatory to arbitration agreements 

was compelled to arbitrate disputes with a signatory of the agreements 

because the guaranty signed by the non-signatory incorporated the 

agreements and the arbitration provisions of the agreements were 

sufficiently broad to bind non-signatories [Clarendon Nat’l Ins. Co. v. 

Lan, 152 F. Supp. 2d 506, 519-521 (S.D.N.Y. 2001)]. A reinsured party 

not specifically named in an excess of loss reinsurance agreement was 

permitted to compel arbitration against the signatory reinsurer under 

the agreement’s arbitration clause as a third-party beneficiary of the 

agreement [Cont’l Cas. Co. v. Certain Underwriters at Lloyd’s London, 

2004 U.S. Dist. LEXIS 4060, at *13-14 (S.D.N.Y. 2004)]. A reinsurance 

intermediary that was not a signatory to reinsurance and retrocession 

agreements containing arbitration clauses was nonetheless compelled 

to arbitrate a dispute concerning a reinsurer’s obligations under those 

agreements. The court found that the intermediary was estopped from 

refusing to arbitration because of its allegations that it suffered harm 

due to the reinsurer’s repudiation of the contracts and because the 

intermediary received a direct benefit from the agreements [Int’l Ins. 

Agency Services, LLC v. Revios Reinsurance U.S., Inc., 2007 U.S. Dist. 

LEXIS 22229, at *14-19 (N.D. Ill. 2007)]. 

� Cross References: For discussions of whether an insolvent company’s 

liquidator or receiver is bound by an agreement to arbitrate, see New 

York Insurance Law § 15.08[4] (Walcott B. Dunham, Jr., ed.); Eric Mills 

Holmes, Appleman on Insurance 2d § 107.2[F]. 

Lexis.com Search: To find a general discussion of arbitration in the 

reinsurance law context, try this source: Reinsurance Law. Using the 

Table of Contents, navigate to Chapter 6 Arbitration. 

40.23 Neutral Panel or Party Advocate System. Arbitration agreements 

typically include provisions stipulating the number of arbitrators and 

their qualifications, the timing and method by which the panel is to be 



selected and whether one arbitrator is to act as an umpire or chairman of 

the panel. Some agreements do not specifically list these procedures, but 

instead incorporate the rules of an arbitration organization containing 

such procedures. If the agreement is completely silent on the method for 

selecting arbitrators, or if the parties “fail to avail” themselves of the 

procedures agreed upon for selecting arbitrators, a court is authorized 

under the Federal Arbitration Act (“FAA”) to appoint any one or all of the 

arbitrators upon application of a party [9 U.S.C. § 5; see also Pac. Reinsurance 

Mgmt. Corp. v. Ohio Reinsurance Corp., 814 F.2d 1324, 1327-29 (9th 

Cir. 1987); AIG Global Trade and Political Risk Ins. Co. v. Odyssey Am. 

Reinsurance Corp., 2006 U.S. Dist. LEXIS 73258, at *15-17 (S.D.N.Y. 2006)]. 

In arbitrations conducted pursuant to reinsurance agreements, the tribunal 

is usually composed of three arbitrators. 

Reinsurance arbitration agreements typically provide that each side is to 

designate its own “party” arbitrator, and then the two designated “party” 

arbitrators are to appoint a third “neutral” arbitrator, usually called an 

“umpire.” Some agreements also include a default mechanism for selection 

of the neutral arbitrator that operates when the parties or party 

arbitrators (where vested with the decision to elect a third, neutral umpire) 

cannot agree on umpire selection. In some instances, parties request the 

organization administering the arbitration to appoint the umpire. 

Unless set forth in the contract, the arbitrators need not meet any 

particular requirements beyond capably performing their task. Arbitration 

clauses in reinsurance agreements, however, usually set forth objective 

qualifications for arbitrators and umpires. Most arbitrators are required to 

have some level of expertise in the reinsurance or insurance industry or to 

be a present or former officer or director of an insurance or reinsurance 

company. In the United States, party-appointed arbitrators may be nonneutral 

and predisposed towards the party that appointed them, unless 

the parties or the contract specifies otherwise [Lozano v. Md. Cas. Co., 850 

F.2d 1470, 1472 (11th Cir. 1988); Merit Ins. Co. v. Leatherby Ins. Co., 714 

F.2d 673, 679 (7th Cir. 1983); Astoria Med. Group v. Health Ins. Plan of 

Greater N.Y., 182 N.E.2d 85, 87-89 (N.Y. 1962)]. Although party-appointed 

arbitrators may have a general predisposition or sympathy with a party or 

its position, this is more in the nature of a duty to give the party 

appointing them a fair hearing; party-appointed arbitrators are not 

surrogates for the party and still must make independent judgments and 

act fairly [Universal Reinsurance Corp. v. Allstate Ins. Co., 16 F.3d 125, 129 

n.2 (7th Cir. 1994); Metro. Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co., 

780 F. Supp. 885, 892 (D. Conn. 1991)]. (There also may be more latitude in 

discussing the merits of the dispute with a party-appointed arbitrator until 

the umpire is selected.) In contrast, umpires are expected to remain 



completely neutral. Both neutral and non-neutral members of the panel 

must participate in the arbitration process in a fair, honest and good faith 

manner and may not exhibit “evident partiality or corruption” [9 U.S.C. 

§ 10(a)(2); Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 644-49 

(6th Cir. 2005); Scott v. Prudential Sec., 141 F.3d 1007, 1015 (11th Cir. 1998)]. 

Arbitrators must disclose to the parties any potentially disqualifying 

interests or relationships [Commonwealth Coatings Corp. v. Cont’l Cas. 

Co., 393 U.S. 145, 147-49 (1968); see also U.S. Wrestling Fed’n v. Wrestling 

Div. of AAU, Inc., 605 F.2d 313, 319 (7th Cir. 1979)]. Failure to disclose 

business or financial relationships that would create an objectively reasonable 

impression of bias could result in vacation of the award [Nationwide 

Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th Cir. 2002); Nw. 

Nat’l Ins. Co. v. Allstate Ins. Co., 832 F. Supp. 1280, 1286-87 (E.D. Wis. 

1993); Barcon Assocs., Inc. v. Tri-County Asphalt Corp., 430 A.2d 214, 

218-21 (N.J. 1981); for a discussion of the circumstances under which 

arbitral awards may be vacated, see § 40.28 below]. 

Court challenges to an arbitrator’s qualifications to serve can only be 

raised after issuance of the award, except in limited circumstances [Gulf 

Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 489-90 (5th Cir. 

2002); Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892, 895-96 (2d Cir. 1997); Ins. 

Co. of N. Am. v. Pennant Ins. Co., Ltd., 1998 U.S. Dist. Lexis 2466, at *5-7 

(E.D. Pa. 1998)]. Some courts have recognized that arbitrators can be 

disqualified prior to rendition of an award, based on courts’ “inherent 

powers” or on general contract principles [see Aviall, Inc. v. Ryder Sys., 

Inc., 110 F.3d 892, 895-96 (2d Cir. 1997); First State Ins. Co. v. Employers Ins. 

of Wausau, No. 99-12478-RWZ (D. Mass. Feb. 23, 2000), reported in 

Mealey’s Litig. Report: Reinsurance, Vol. 10, No. 21 (Mar. 9, 2000) at C-1; 

Evanston Ins. Co. v. Kansa Gen. Int’l Ins. Co., Ltd., No. 94 C 4957 (N.D. Ill. 

Oct. 17, 1994), reported in Mealey’s Litig. Report: Reinsurance, Vol. 5, No. 

14 (Nov. 23, 1994) at A-1]. 

t Warning: Many arbitration agreements include a provision, sometimes 

called an “adverse selection clause,” stating that if a party fails 

to appoint an arbitrator within a specified time following receipt of a 

written request to designate an arbitrator, the other party may appoint 

both “party-appointed” arbitrators. Section 5 of the FAA requires that 

the parties follow the contractually specified method for appointing 

arbitrators [9 U.S.C. § 5]. Parties should carefully observe any timetable 

or procedures set forth in their contracts for selecting arbitrators 

to avoid forfeiting the right to appointment [see Universal Reinsurance 

Corp. v. Allstate Ins. Co., 16 F.3d 125, 128-29 (7th Cir. 1994); Evanston 

Ins. Co. v. Gerling Global Reinsurance Corp., 1990 U.S. Dist. LEXIS 



12521, at *7-8 (N.D. Ill. 1990); Employers Ins. of Wausau v. Jackson, 527 

N.W.2d 681, 688-89 (Wis. 1995)]. Some courts have been reluctant, 

however, to find that a party making an untimely selection forfeited its 

appointment right, unless the parties expressly made time of the 

essence in the contract’s arbitration provision [see Ancon Ins. Co. 

(U.K.) v. GE Reinsurance Corp., 2007 U.S. Dist. LEXIS 24822, at *23-24 

(D. Kan. 2007); RLI Ins. Co. v. Kansa Reinsurance Co., 1991 U.S. Dist. 

LEXIS 16388, at *9 (S.D.N.Y. 1991); New England Reinsurance Corp. v. 

Tenn. Ins. Co., 780 F. Supp. 73, 77-78 (D. Mass. 1991)]. 

� Cross Reference: For an example of an adverse selection clause in a 

facultative certificate, see California Insurance Law and Practice 

§ 11.07[2][c]. 

� Cross Reference: For a survey and discussion of the standards for 

selection of party-appointed arbitrators that are set forth in the major 

private international arbitration rules, see Doak Bishop and Lucy Reed, 

Practical Guidelines for Interviewing, Selecting and Challenging Party- 

Appointed Arbitrators in International Commercial Arbitration, in Arbitration 

International, Vol. 14, No. 4 (LCIA 1998) at 395. 

� Cross References: Many arbitration agencies maintain lists of qualified 

individuals from which parties can select arbitrators. For example, 

ARIAS-U.S. publishes a list of certified reinsurance arbitrators and 

umpires [see www.arias-us.org]. The American Arbitration Association 

also maintains a roster of prospective arbitrators and mediators 

experienced in various industries [see www.adr.org]. 

z Strategic Point: Considerable care should be taken in appointing a 

party arbitrator who is fair and knowledgeable. The party arbitrator 

should understand the issues well and be able to articulate a coherent 

view of the case. It is helpful if the arbitrator has sufficient standing in 

the industry to influence other panel members or at least not to be 

intimidated by other arbitrators with more experience or “better” 

credentials Umpires ideally should have industry knowledge as well 

arbitration experience. 

z Strategic Point: The parties can dispense with some of the back and 

forth in the appointment of arbitrators and umpires by agreeing to a 

process — or a joint list of candidates — at the time their dispute 

ripens. 

� Cross Reference: The “Code of Ethics for Arbitrators in Commercial 

Disputes,” prepared by a joint committee of the American Arbitration 



Association (“AAA”) and the American Bar Association (“ABA”), sets 

forth generally accepted standards of ethical conduct for the guidance 

of arbitrators and parties. The current (2004) version is available on the 

American Bar Association website, at ww.abanet.org/dispute/ 

commercial_disputes.pdf. 

� Cross Reference: For a sample questionnaire for prospective umpires, 

see § 40.47 below. 

� Cross Reference: The ARIAS-U.S. Umpire Appointment Procedure is 

available on its website at www.arias-us.org. In addition, the “Procedures 

for the Resolution of U.S. Insurance and Reinsurance Disputes,” 

drafted by the Insurance and Reinsurance Dispute Resolution Task 

Force, include a procedure for the selection of an all-neutral arbitration 

panel [see Procedures at www.ArbitrationTaskForce.org]. 

40.24 Strict Rule of Law vs. Obligations Pursuant to Honorable Engagement. 

Most reinsurance agreements include an honorable engagement clause 

which typically instructs arbitrators to interpret the contract “as an 

honorable engagement and not merely as a legal obligation,” and relieves 

arbitrators from following the strict rules of law [for a sample arbitration 

provision containing typical honorable engagement language, see § 40.46 

below]. This language reflects the overriding commercial practicality 

inherent in reinsurance relationships and embodies the mutual duty of 

utmost good faith. [For a discussion of the duty of utmost good faith in 

reinsurance relationships, see §§ 40.15 and 40.16 above]. Honorable engagement 

clauses can allow arbitrators to find a resolution that best 

reflects the purpose and intent behind the transaction at issue. An 

honorable engagement clause, however, does not necessarily supplant the 

obligation of the panel formally to issue a statement of reasons for the 

decision they reach, which is a separate issue. 

Language relieving arbitrators from following strict rules of law permits 

arbitrators to apply principles of fairness, equity and commercial practice 

in resolving reinsurance disputes. “Courts have read honorable engagement 

clauses generously, consistently finding that arbitrators have wide 

discretion to order remedies they deem appropriate” [Banco de Seguros 

del Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 261 (2d Cir. 2003); see 

also Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 935 F.2d 

1019, 1025 (9th Cir. 1991); Certain Underwriters at Lloyd’s v. Argonaut Ins. 

Co., 264 F. Supp. 2d 926, 939 (N.D. Cal. 2003)]. Arbitrators may be 

persuaded by relevant case law, but, as a general matter, are not required 

to resolve matters based on how they believe a court would decide the 

issue, which also reflects that the qualifications clause in the arbitration 



agreement often does not require that the arbitrators be trained in the law 

[see U.S. Life Ins. Co. v. Ins. Comm’r of the State of Cal., 2005 U.S. App. 

LEXIS 25763, at *7-8 (9th Cir. 2005) (unpublished decision); Nw. Nat’l Ins. 

Co. v. Generali Mex. Compania De Seguros, S.A., 2000 U.S. Dist. LEXIS 

7348, at *4 (S.D.N.Y. 2000); Employers Ins. of Wausau v. Certain Underwriters 

at Lloyd’s London, 552 N.W.2d 420, 427 n.8 (Wis. Ct. App. 1996); 

for a discussion of the rare circumstances under which arbitral awards 

may be vacated under the “manifest disregard of the law” standard, see 

§ 40.28 below]. Instead, they may, and often do, apply industry custom 

and practice as well as equitable principles to reach their decisions. Unless 

the contract provides otherwise, arbitrators in U.S. arbitrations are not 

obligated to issue a reasoned decision explaining the award. [For a 

discussion of reasoned awards in reinsurance arbitrations, see § 40.27 

below]. 

Example: Contract language permitting the arbitrators to “consider 

this contract an honorable engagement rather than merely a legal 

obligation” and absolving the arbitrators from “following the strict 

rules of law” was broad enough to give the arbitrators the power to 

determine the preclusive effect of a prior arbitration award [N. River 

Ins. Co. v. Allstate Ins. Co., 866 F. Supp. 123, 129 (S.D.N.Y. 1994)]. 

Example: The court determined that a reinsurance treaty relieving 

arbitrators of all judicial formalities and providing that they may 

abstain from following strict rules of law empowered the arbitrators to 

award relief in “any reasonable form or at any stage in the proceeding,” 

including ordering a party to post additional pre-hearing security 

[Meadows Indem. Co., Ltd. v. Arkwright Mut. Ins. Co., 1996 U.S. 

Dist. LEXIS 14318, at *12-13 (E.D. Pa. 1996)]. 

40.25 Discovery in Arbitration. The broad and liberal rules governing 

pretrial discovery in state and federal civil cases generally do not apply in 

arbitrations, unless the parties so agree or the panel so orders. The nature 

and extent of discovery available in reinsurance arbitrations varies widely, 

depending upon the nature of the case, the arbiters’ views on the issue, 

and the particular rules governing the arbitration. Document discovery is 

almost universally permitted in arbitration; however, the amount of 

document discovery can differ significantly. Some arbiters will allow 

discovery only on the specific claims and reinsurance contracts at issue in 

the arbitration, while others essentially will permit the parties to request 

any documents they wish. In addition, some arbiters will allow depositions, 

while others will not (especially from third parties). 

Although arbitration clauses often do not address the arbitrators’ author- 



ity to resolve discovery disputes, it is commonly recognized that arbitrators 

have the authority to resolve procedural disputes, including the scope 

and nature of permissible discovery. As can be expected, the parties often 

raise privilege and other production disputes during the discovery 

process. These disputes typically are resolved by means of letter briefs to 

the panel or a conference call with the umpire. Occasionally, the panel will 

hold a hearing with counsel to resolve a discovery dispute. 

Under Section 7 of the Federal Arbitration Act (“FAA”) [9 U.S.C. § 7], and 

the laws of most states, arbitrators have broad power to issue subpoenas 

and subpoenas duces tecum, if the evidence sought for the hearing is 

material to the proceedings. The FAA does not, however, specifically 

address the arbitrators’ power to require non-parties to submit to prehearing 

discovery. As a result, case law is split as to whether arbitrators 

have the authority to order pre-hearing discovery of non-parties, particulary 

pre-hearing deposition discovery. The Fourth Circuit Court of Appeals 

has held that arbitrators’ powers should be limited to those 

specifically set forth in the FAA; therefore, pre-hearing discovery of 

non-parties is prohibited unless a party demonstrates a “special need” [see 

Comsat Corp. v. Nat’l Science Found., 190 F.3d 269, 274-76 (4th Cir. 1999); 

Application of Deiulemar Compagnia Di Navigazione S.P.A. v. M/V 

Allegra, 198 F.3d 473, 480-81 (4th Cir. 1999)]. In contrast, the Eighth Circuit 

Court of Appeals and several federal district courts have held that implicit 

in an arbitration panel’s power to subpoena relevant documents for 

production at a hearing is the power to order the production of documents 

prior to the hearing [see In re Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 

(8th Cir. 2000); In re Arbitration between Douglas Brazell v. Am. Color 

Graphics, Inc., 2000 U.S. Dist. LEXIS 4482, at *4-9 (S.D.N.Y. 2000); Amgen 

Inc. v. Kidney Ctr. of Delaware County, Ltd., 879 F. Supp. 878, 880 (N.D. Ill. 

1995)]. The Third Circuit Court of Appeals has determined that the text of 

the FAA limits the subpoena power of arbitrators to compelling production 

of documents by non-parties only at an actual arbitration hearing 

[Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 

2004)]. In one case, the court approved a “special purpose hearing” for 

non-parties to respond to arbitral subpoenas, reasoning that “[n]othing in 

the language of the FAA limits the point in time in the arbitration process 

when [the subpoena] power can be invoked or says that the arbitrators 

may only invoke this power under section 7 at the time of the trial-like 

final hearing” [Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 577 (2d Cir. 

2005), quoting Odfjell ASA v. Celanese AG, 348 F. Supp. 2d 283, 287 

(S.D.N.Y. 2004); see also Hay Group v. E.B.S. Acquisition Corp., 360 F.3d 

404, 413-14 (3d Cir. 2004) (Chertoff, J., concurring)]. 

Some courts have approved pre-hearing subpoenas for production of 



documents, but not for depositions [see SchlumbergerSema, Inc. v. Xcel 

Energy, Inc., No. 02-4304, 2004 U.S. Dist. LEXIS 389, at *7 (D. Minn. Jan. 9, 

2004); Atmel Corp. v. LM Ericsson Telefon, AB, 371 F. Supp. 2d 402, 403-04 

(S.D.N.Y. 2005); Integrity Ins. Co. v. Am. Centennial Ins. Co., 885 F. Supp. 

69, 71 (S.D.N.Y. 1995)]. Other courts have acknowledged broad arbitral 

power to order both documentary and testimonial discovery of nonparties 

before a final hearing, a result that can be justified especially where 

such discovery may facilitate speedier resolution of the principal dispute 

[see Stanton v. Paine Webber Jackson & Curtis, Inc., 685 F. Supp. 1241, 

1242-43 (S.D. Fla. 1988)]. Several courts weighing the question of arbitral 

power to summon pre-hearing evidence from non-parties have taken into 

account the non-parties’ relationships to the parties and to the disputed 

matters [see In re Sec. Life Ins. Co. of Am., 228 F.3d at 871; In re Arbitration 

between Douglas Brazell v. Am. Color Graphics, Inc. 2000 U.S. Dist. LEXIS 

4482, at *9; Meadows Indemnity Co., Ltd. v. Nutmeg Ins. Co., 157 F.R.D. 

42, 45 (M.D. Tenn. 1994)]. 

� Cross Reference: Several arbitration organizations have published 

discovery procedures that can be incorporated in arbitration agreements 

or otherwise adopted by parties for use in reinsurance arbitrations. 

ARIAS-U.S., for example, includes discovery procedures in its 

“Practical Guide to Reinsurance Arbitration Procedure” [see ARIAS- 

U.S. Practical Guide at www.arias-us.org]. Discovery also is included 

in the “Procedures for the Resolution of U.S. Insurance and Reinsurance 

Disputes” published by the Insurance and Reinsurance Dispute 

Resolution Task Force [see Procedures at www.arbitrationtaskforce- 

.org]. In addition, “The CPR International Reinsurance Industry Dispute 

Resolution Protocol,” published by the International Institute for 

Conflict Prevention & Resolution, includes procedures for the parties’ 

exchange of information [see Protocol at www.insurancemediation- 

.org]. 

z Strategic Point: Given the conflicting case law interpreting arbitrators’ 

subpoena power under Section 7 of the FAA, it is unclear whether 

a pre-hearing arbitral subpoena issued to a non-party will be enforced 

by a court. Reinsurance intermediaries are typically not parties to 

arbitrations between ceding insurers and reinsurers but often possess 

critical information relevant to reinsurance agreements. Parties who 

wish to ensure that intermediaries will be required to provide prehearing 

testimonial and documentary evidence in the event a reinsurance 

dispute reaches arbitration have several options: 

1. The intermediary can be made a party to the reinsurance 



contract, making it a three-way agreement among the cedent, 

reinsurer and intermediary; 

2. The intermediary can be made a party only to the intermediary 

and arbitration clauses of the reinsurance agreement (in either 

case, the arbitration clause could provide that the intermediary 

submit to pre-hearing discovery in disputes arising out of the 

agreement); and 

3. A provision in the agreement between the ceding insurer and its 

intermediary can require the intermediary to cooperate with the 

arbitration panel in pre-hearing discovery in any dispute arising 

under an reinsurance contract placed by the intermediary. 

Of course, intermediaries may resist such approaches. As a practical 

matter, at the time of a dispute, both parties to the reinsurance contract 

may wish to have access to the intermediary’s documents and witnesses, 

and either or both may have ongoing commercial relations with the 

intermediary, both of which counsel that the parties may be able to reach 

a practical accommodation of the intermediary’s interest (including perhaps 

agreeing to defray part of the intermediary’s cost of compliance). 

Consider: Nevertheless, the federal District Court for the District of 

Massachusetts, following the Third Circuit’s decision in Hay Group 

Inc., dismissed a petition to enforce a subpoena that had been issued 

by an arbitration panel to a non-party [Liberty Mut. Ins. Co. v. White 

Mountains Ins. Group Ltd., No. 06-11901 (D. Mass. 2007), reprinted in 

Mealey’s Litig. Rep. Reinsurance, Vol. 17, No. 22 (Mar. 22, 2007) at 4]. 

40.26 Summary Disposition in Arbitration. Dispositive motions have traditionally 

been granted sparingly in reinsurance arbitrations; however, there 

appears to be a growing understanding that such motions should be 

granted in arbitrations where the facts and circumstances so warrant. 

There is ample authority supporting an arbitration panel’s granting of a 

motion for summary disposition without live testimony or a full evidentiary 

hearing, if the evidence omitted is not legally relevant or is 

cumulative. 

Although there is no express statutory authority under the Federal 

Arbitration Act (“FAA”) [9 U.S.C. § 1, et seq.] for an arbitrator to respond 

to a dispositive motion, arbitrators are generally assumed to have all 

discretionary authority necessary to conduct the proceedings in a manner 

that is not expressly prohibited by the arbitration agreement between the 

parties or the FAA [Terry L. Trantina, “An Attorney’s Guide to Alternative 

Dispute Resolution (ADR): ’ADR 1.01,”’ 1 A.B.A. Sec. Bus. L. 8 (Jan. 2003), 



available at http://www.abanet.org/buslaw/newsletter/0008/adr/ 

adr101.pdf; see also John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 

(1964)]. The revised Uniform Arbitration Act (the “UAA”) expressly 

permits arbitrators to decide a request for summary disposition based 

solely on documentation, after a party submitting the request gives notice 

and opposing parties have a reasonable time to respond [see UAA § 15(b) 

(2000), available at http://www.nccusl.org]. The Procedures for the Resolution 

of U.S. Insurance and Reinsurance Disputes issued by the Insurance 

and Reinsurance Dispute Resolution Task Force also specifically authorize 

consideration of summary disposition motions by reinsurance arbitration 

panels [Reinsurance Ass’n of America, Procedures for the Resolution of 

U.S. Insurance and Reinsurance Disputes § 13.1 (2004)]. In addition, the 

American Arbitration Association (“AAA”) Commercial Arbitration Rules 

give arbitrators wide latitude to conduct the proceedings and do not 

prohibit the use of dispositive motions. The AAA Procedures for Large, 

Complex Commercial Disputes also appear to permit summary adjudication 

by allowing arbitrators to “take such steps as they may deem 

necessary or desirable to avoid delay and to achieve a just, speedy and 

cost-effective resolution” of the cases [American Arbitration Ass’n, Commercial 

Arbitration Rules and Mediation Procedures R-30(b) (2005); 

American Arbitration Ass’n, Procedures for Large, Complex Commercial 

Disputes L-4(a) (2005)]. 

Parties may agree upon appropriate procedures by contract, but where 

they do not, arbitrators have wide discretion to decide procedural matters 

and determine the meaning of procedural rules [see Bell Atlantic- 

Pennsylvania, Inc. v. Communications Workers of Am., Local 13000, 164 

F.3d 197, 201-02 (3d Cir. 1999); Raytheon Co. v. Computer Distrib., Inc., 632 

F. Supp. 553, 557-58 (D. Mass. 1986); for a discussion of arbitrators’ 

freedom to dispense with judicial formalities and determine arbitration 

procedures, see § 40.23 above]. Consistent with the goals of speed and 

efficiency in arbitration, arbitrators are encouraged to take appropriate 

action to simplify and expedite proceedings [see PaineWebber Group, Inc. 

v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 995 (8th Cir. 1999); Cearfoss 

Constr. Corp. v. Sabre Constr. Corp., 1989 U.S. Dist. LEXIS 9639, at *12-13 

(D.D.C. Aug. 10, 1989)]. Unless otherwise restricted, this mandate leaves 

arbitrators free to consider and grant motions for summary adjudication 

of issues or summary judgment 

The power of arbitrators to grant summary disposition may be restricted, 

however, by arbitration agreements that expressly limit such authority. 

The FAA requires courts to enforce privately negotiated agreements to 

arbitrate, like other contracts, in accordance with their terms, and parties 

may stipulate by contract the rules under which their arbitration will be 



conducted [see Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 

57 (1995); Baravati v. Josephthal, Lyon & Ross, Inc. 28 F.3d 704, 709 (7th Cir. 

1994)]. Arbitrators generally are required to follow any procedures set 

forth in the parties’ agreement [W. Employers Ins. Co. v. Jeffries & Co., 958 

F.2d 258, 262 (9th Cir. 1992)]. Therefore, a contract provision prohibiting 

summary adjudication in the arbitration proceeding most likely precludes 

such action. 

The authority of arbitrators to decide motions for summary disposition is 

usually litigated in court proceedings to vacate or confirm the award. 

Generally, there are very limited grounds for courts to vacate arbitral 

awards under the FAA, the Convention on the Recognition and Enforcement 

of Foreign Arbitral Awards (the “New York Convention”) and state 

arbitration acts. [For a discussion of the circumstances under which courts 

vacate arbitral awards, see § 40.28 below]. Challenges to an arbitration 

panel’s decision to grant a motion for summary disposition typically fall 

into two categories. Parties contend that the arbitrators lacked the 

authority to grant the dismissal motion (exceeded their powers) or assert 

that the panel engaged in misconduct by improperly refusing to hear 

evidence. Courts have made clear that misbehavior cognizable under 

Section 10(a)(3) of the FAA “must amount to a denial of fundamental 

fairness of the arbitration proceeding” in order to justify overturning an 

award” [Max Marx Color & Chem. Co. Employees’ Profit Sharing Plan v. 

Barnes, 37 F. Supp. 2d 248, 252 (S.D.N.Y. 1999)]. In the cases confirming 

summary decisions, courts agreed with the arbitrators that an evidentiary 

hearing was not necessary because any excluded evidence either was 

duplicative or not material to the issues in dispute [see Hudson v. ConAgra 

Poultry Co., 2007 U.S. App. LEXIS 7681, at *19-20 (8th Cir. 2007); Sheldon 

v. Vermonty, 269 F.3d 1202, 1207 (10th Cir. 2001); Pegasus Constr. Corp. v. 

Turner Constr. Co., 929 P.2d 1200, 1201-03 (Wash. Ct. App. 1997)]. 

Alternatively, courts vacating summary awards determined that summary 

adjudication was inappropriate because the arbitrators’ failure to receive 

pertinent evidence resulted in palpable prejudice to a party [see Int’l 

Union, United Mine Workers of Am. v. Marrowbone Dev. Co., 232 F.3d 

383, 387-90 (4th Cir. 2000); Prudential Sec., Inc. v. Dalton, 929 F. Supp. 1411, 

1417-18 (N.D. Okla. 1996)]. Vacatur will not be granted simply because the 

court might have come to a different result. 

Examples: Several courts have found that the “hearing” mandated by 

Section 10 of the FAA does not necessarily require oral presentation or 

live witness testimony [see, e.g., Fed. Deposit Ins. Corp. v. Air Fla. Sys., 

Inc., 822 F.2d 833, 842-43 (9th Cir. 1987); Griffen Indus. v. Petrojam, 

Ltd., 58 F. Supp. 2d 212, 219-21 (S.D.N.Y. 1999); but see British Ins. Co. 



of Cayman v. Water St. Ins. Co., 93 F. Supp. 2d 506, 517-19 (S.D.N.Y. 

2000)]. 

Examples: Courts have confirmed summary awards in arbitral proceedings 

despite the absence of explicit authorization for the procedure 

in the governing rules or statutes [see Melchers v. Corbin Assocs., 

LLC, 2006 U.S. Dist. LEXIS 18049, at *19-26 (E.D. Tenn. 2006); Pegasus 

Constr. Corp. v. Turner Constr. Co., 929 P.2d 1200, 1203 (Wash. Ct. App. 

1997); Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal. App. 4th 

1096, 1104 (1995)]. 

Example: A federal district court confirmed an arbitration panel’s 

summary award where a party, All American Life Insurance Co. (“All 

American”), “admitted” in its position statement that a broker did not 

have the authority to bind All American to the contracts at issue in the 

dispute. The panel found that the position statement constituted a 

pleading and that All American had made an irrevocable admission 

that the broker did not have binding authority; therefore the contracts 

were not valid [Sphere Drake Ins. Ltd. v. All Am. Life Ins. Co., 2004 

U.S. Dist. LEXIS 3494, at *8-10 (N.D. Ill. 2004)]. In a motion to vacate 

the award, All American argued that it had been denied a fundamentally 

fair hearing because the panel gave undue weight to the alleged 

“admission,” exceeded its authority by deciding a legal issue reserved 

for the courts and a factual issue not before it, and exhibited a manifest 

disregard for the law by misinterpreting state contract law [id. at 

*33-42]. In affirming the panel’s award, the court did not specifically 

address whether or not the panel had the authority to decide the 

matter by ruling on the motion for judgment on the pleadings. 

However, the court’s opinion clearly assumes that the panel had this 

power and rejects each of All American’s purported grounds for 

vacatur [id.]. 

z Strategic Point: Dispositive motions can streamline the arbitral 

process by eliminating specious claims and defenses. Although arbitrators 

are sometimes wary of the practice and courts will carefully 

scrutinize summary rulings, submission of dispositive motions can be 

a successful and appropriate tactic in arbitration where there is no 

relevant or material evidence necessary for resolution of a particular 

claim, or of the entire dispute. 

40.27 Reasoned Awards. Reinsurance arbitration panels typically issue a 

signed written decision articulating the award. If the decision is not 

unanimous, a written dissent also may be issued. In the United States, an 



arbitration panel need not set forth the rationale supporting its award, 

unless the parties’ arbitration agreement requires it to do so [N.Y. Stock 

Exch. Arbitration between Fahnestock & Co., Inc. v. Waltman, 935 F.2d 512, 

516 (2d Cir. 1991); Koch Oil, S.A. v. Transocean Gulf Oil Co., 751 F.2d 551, 

554 (2d Cir. 1985)]. Thus, many arbitral decisions are presented in a brief 

statement outlining the nature of the dispute, stating the prevailing party 

and describing any relief awarded. The parties may, however, require the 

reinsurance arbitration panel to explain the reasoning for an award as a 

pre-requisite for being appointed to the panel. 

z Strategic Point: Although arbitration is sometimes derided as unduly 

allowing arbitrators to reach compromise awards, that also is one 

virtue of the process, so parties should consider their philosophical 

tolerance for one approach or the other when drafting an arbitration 

clause. Note also that the absence of reasoned awards, especially when 

honorable engagement clauses apply, may increase differences in 

outcomes from one arbitration to the next; whether differences in the 

outcomes in a portfolio of similar disputes is acceptable or not is 

something parties should consider at the time they draft their arbitration 

agreements. 

40.28 Know When to Move to Vacate or Affirm Arbitration Award. After a 

reinsurance arbitration panel renders its award, the prevailing party may 

submit a motion in court to confirm the award or the losing party may 

move to have the award vacated, or both. These steps are not necessary if 

the parties simply act in accordance with the award but are often taken to 

conclude or challenge the process. 

z Strategic Point: On balance, it is probably a good practice for the 

prevailing party to have the award confirmed even if the losing party 

intends to comply with the award. A confirmation action need not be 

contentious, but it allows the prevailing party to have an executable 

judgment. 

s Timing: If the arbitration agreement specifies a particular court for 

confirmation, the party seeking to confirm the award may request a 

confirmation order from the specified court any time within one year 

of the award [9 U.S.C. § 9]. 

Consider: If the arbitration agreement does not specify a confirmation 

court, application for confirmation “may be made to the United States 

court in and for the district within which [the] award was made” [id.]. 

An arbitration award will be summarily confirmed upon motion by a 

party, absent grounds for vacatur, modification or correction [id.]. It 



should be noted that moving to confirm or vacate an award under the 

Federal Arbitration Act does not in and of itself constitute a basis for 

federal court jurisdiction (so independent subject matter jurisdiction is 

needed though the fact of an arbitration alone is sufficient to show an 

“actual controversy”), although moving to confirm or vacate under the 

New York Convention does provide an independent fount of jurisdiction 

in the appropriate court. 

The grounds upon which an arbitration award can be vacated are 

extremely narrow under the Federal Arbitration Act (“FAA”) [9 U.S.C. 

§ 10], state statutes and the New York Convention. The “[e]xceptions to 

confirmation are strictly limited so as not to frustrate the basic purpose of 

arbitration to dispose of disputes quickly and to avoid the expense and 

delay of protracted court proceedings” [Transit Cas. Co. v. Trenwick 

Reinsurance Co., 659 F. Supp. 1346, 1351 (S.D.N.Y. 1987)]. While decades 

ago courts were more receptive to challenges to arbitration awards, that is 

not true today. Under Section 10 of the FAA, awards typically are vacated 

only where arbitrators exhibited bias or procedural unfairness (as opposed 

to procedural error). The district courts are not to function as an appellate 

forum to second-guess what happened in the arbitration, and the standard 

of review they apply is much narrower than the federal appellate courts 

apply to decisions of the district courts. The following are the specific 

statutory circumstances justifying vacatur of an arbitral award: 

• “Where the award was procured by corruption, fraud, or undue 

means” [9 U.S.C. § 10(a)(1)]. A party who alleges that an arbitration 

award was procured through fraud or undue means must demonstrate 

that the improper behavior was: (1) not discoverable by due 

diligence before or during the arbitration hearing; (2) materially 

related to an issue in the arbitration; and (3) established by clear 

and convincing evidence [Houston Gen. Ins. Co. v. Certain Underwriters 

at Lloyd’s London, 2003 U.S. Dist. LEXIS 19516, at *3-4 

(S.D.N.Y. 2003); Trans Chem. Ltd. v. China Nat’l Mach. Import & 

Export Corp., 978 F. Supp. 266, 304 (S.D. Tex. 1997)]. Fraud typically 

requires a showing of bad faith and may be evidenced by bribery 

or by willful destruction or withholding of evidence [id.; Indocomex 

Fibres Pte., Ltd. v. Cotton Co. Int’l, Inc., 916 F. Supp. 721, 

728 (W.D. Tenn. 1996)]. 

• “Where there was evident partiality or corruption in the arbitrators, 

or either of them” [9 U.S.C. § 10(a)(2)]. Although there is disagreement 

among courts as to precisely what an arbitrator must disclose 

to avoid a claim of “evident partiality,” courts typically look for a 

real and direct financial interest in the result of the arbitration or a 



direct business relationship with one of the parties that calls into 

question his or her neutrality [see Commonwealth Coatings Corp. v. 

Cont’l Cas. Co., 393 U.S. 145, 146-48 (1968); Sphere Drake Ins. Ltd. 

v. All Am. Life Ins. Co., 307 F.3d 617, 621-23 (7th Cir. 2002); Hobet 

Mining, Inc. v. Int’l Union, United Mine Workers, 877 F. Supp. 1011, 

1021 (S.D. W. Va. 1994)]. Nondisclosure sufficient to vacate an 

award usually creates a concrete, and not merely speculative, 

impression of bias [see Positive Software Solutions, Inc. v. New 

Century Mortgage Corp., 476 F.3d 278, 286 (5th Cir. 2007); Nationwide 

Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th Cir. 

2002); Gianelli Money Purchase Plan and Trust v. ADM Investor 

Servs., Inc., 146 F.3d 1309, 1312-13 (11th Cir. 1998)]. Some courts 

have stated that “evident partiality” is present when a reasonable 

person would conclude that the arbitrator acted with partiality (but 

mere unhappiness in or disagreement with the outcome is not 

equated with the arbitrator’s having acted in a partial manner) 

[Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1523 n.30 (3d Cir. 

1994), (citations omitted); Lourdes Med. Ctr. of Burlington County 

v. Jnesco, 2007 U.S. Dist. LEXIS 25458, at *24-25 (D.N.J. 2007); 

Vigorito v. UBS Painewebber, Inc., 477 F. Supp. 2d 481, 486-87 (D. 

Conn. 2007)]. 

• “Where the arbitrators were guilty of misconduct in refusing to 

postpone the hearing, upon sufficient cause shown, or in refusing to 

hear evidence pertinent and material to the controversy; or of any 

other misbehavior by which the rights of any party have been 

prejudiced” [9 U.S.C. § 10(a)(3)]. Arbitrators are accorded wide 

latitude in conducting hearings and are not constrained by formal 

rules of procedure or evidence [Robbins v. Day, 954 F.2d 679, 685 

(11th Cir. 1991); for discussions of arbitrators’ broad powers to 

conduct proceedings, see §§ 40.24, 40.25 and 40.26 above]. They 

may simplify and expedite proceedings, and they are not bound to 

hear all of the evidence tendered by the parties [PaineWebber 

Group, Inc. v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 995 (8th Cir. 

1999); Robbins v. Day, 954 F.2d 679, 685 (11th Cir. 1992)]. Therefore, 

an arbitral award will not be vacated unless an error in the arbitral 

misconduct deprived a party of a fundamentally fair hearing [El 

Dorado Sch. Dist. #15 v. Cont’l Cas. Co., 247 F.3d 843, 847-48 (8th 

Cir. 2001); Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 

1997)]. 

• “Where the arbitrators exceeded their powers, or so imperfectly 

executed them that a mutual, final and definite award upon the 

subject matter submitted was not made” [9 U.S.C. § 10(a)(4)]. The 



question whether arbitrators have exceeded their powers focuses 

on whether the arbitration agreement, or the parties’ submissions 

to the panel, gave the arbitrators the power to reach a particular 

issue [Reliastar Life Ins. Co. of N.Y. v. EMC Nat’l Life Ins. Co., 2007 

U.S. Dist. LEXIS 9861, at *3-4 (S.D.N.Y. 2007)]. An award will not be 

vacated for indefiniteness unless it is not sufficiently clear or 

specific enough to be enforced if judicially confirmed [IDS Life Ins. 

Co. v. Royal Alliance Assocs, 266 F.3d 645, 650 (7th Cir. 2001); 

Certain Underwriters at Lloyd’s v. BCS Ins. Co., 239 F. Supp. 2d 812, 

816 (N.D. Ill. 2003)]. 

The burden of proof rests on the party seeking to vacate an arbitral award 

[Transit Cas. Co. v. Trenwick Reinsurance Co., 659 F. Supp. 1346, 1351 

(S.D.N.Y. 1987)]. 

Some courts have determined that an award also may be vacated when an 

arbitrator exhibits a “manifest disregard of the law” [see Westerbeke Corp. 

v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 208-09 (2d Cir. 2002); Mich. Mut. 

Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832 (9th Cir. 1995)], a rule that 

cannot be vigorously applied in the teeth of an honorable engagement 

clause. Courts recognizing this doctrine will not disturb an arbitrator’s 

interpretation of the law unless it is clear that the arbitrator “appreciated[d] 

the existence of a clearly governing legal principle but decided[d] to 

ignore or pay no attention to it” [Merrill Lynch, Pierce, Fenner, & Smith, 

Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986). “The error must have been 

obvious and capable of being readily and instantly perceived by the 

average person qualified to serve as an arbitrator” [id.]. Other courts have 

rejected the “manifest disregard of the law” standard as “reflect[ing] 

precisely that mistrust of arbitration . . . which the [United States 

Supreme] Court [has] criticized” [Baravati v. Josephthal, Lyon & Ross, Inc., 

28 F.3d 704, 706 (7th Cir. 1994); see also Robbins v. Day, 954 F.2d 679, 684 

(11th Cir. 1992)]. The “manifest disregard of the law” standard has not 

been applied so as to vacate a reinsurance arbitration award in any 

reported court decision; recent reported cases in both reinsurance and 

non-insurance arbitrations should not provide confidence that this vein 

will prove to be a particularly promising angle to mine. 

Another potential challenge to an arbitral award is the assertion that the 

award is contrary to public policy [see United Paperworkers Int’l Union v. 

Misco, Inc., 484 U.S. 29, 43 (1987); Milwaukee Bd. of Sch. Dirs. v. 

Milwaukee Teachers’ Educ. Ass’n, 287 N.W.2d 131, 135 (Wis. 1980)]. More 

action has occurred in the non-insurance context on this argument, 

especially concerning relationships between employers and employees, 

health care providers and their members, and other relationships marked 



by imbalances of power such as consumer contracts. This exception to the 

general deference granted arbitrators is very limited and can succeed only 

if the decision clearly violates explicit, well-defined and dominant public 

policy that can be easily seen in laws or judicial precedent [Commercial 

Union Ins. Co. v. Lines, 378 F.3d 204, 208-09 (2d Cir. 2004); Painewebber, 

Inc. v. Agron, 49 F.3d 347, 350 (8th Cir. 1995); Seymour v. Blue Cross/Blue 

Shield, 988 F.2d 1020, 1024 (10th Cir. 1993)]. With sophisticated commercial 

entities on both sides of a reinsurance contract, this style of argument too 

is unlikely to gain much traction in the absence of some well-ensconced 

public policy in the state (set forth in statute or prior high court decision). 

In the following limited circumstances, a United States court may issue an 

order modifying or correcting an arbitral award in order to “effect the 

intent thereof and promote justice between the parties:” 

• “Where there was an evident material miscalculation of figures or 

an evident material mistake in the description of any person, thing 

or property referred to in the award;” 

• “Where the arbitrators have awarded upon a matter not submitted 

to them, unless it is a matter not affecting the merits of the decision 

upon the matter submitted;” and 

• “Where the award is imperfect in matter of form not affecting the 

merits of the controversy” [9 U.S.C. § 11]. 

Consider: If the arbitration is conducted under the auspices of an 

arbitration organization, then the rules of that agency concerning 

appeals of arbitral awards may apply. 

Example: The federal District Court for the District of the Virgin Islands 

affirmed vacatur of an arbitral award where the arbitrator failed to 

postpone the hearing after a party submitted an amended arbitration 

claim and voluminous supporting documentation 24 hours before the 

scheduled hearing and denied the opposing party a continuance to 

investigate the amended claim [Coastal Gen. Constr. Servs., Inc. v. 

Virgin Islands Hous. Auth., 238 F. Supp. 2d 707, 708-10 (D.V.I. 2002)]. 

Example: The Tennessee Court of Appeals affirmed the trial court’s 

refusal to vacate an arbitral award on the basis of evident partiality, 

where the party did not object to or seek clarification of the arbitrator’s 

disclosed conflict of interest until after an unfavorable award was 

issued [Bailey v. Am. Gen. Life and Accident Ins. Co., 2005 Tenn. App. 

LEXIS 838, at *27-30 (Tenn. Ct. App. 2005)]. 

Examples: A federal district court ordered correction of an arbitral 



award to conform the amount of the written award to the amount the 

panel had verbally announced [Nationwide Mut. Ins. Co. v. First State 

Ins. Co., 213 F. Supp. 2d 10, 14-16 (D. Mass. 2002)]. A federal district 

court remanded the case to the arbitrators with directions to reopen 

the proceedings and correct an acknowledged material miscalculation 

[Laurin Tankers Am., Inc. v. Stolt Tankers, Inc., 36 F. Supp. 2d 645, 

652-53 (S.D.N.Y. 1999)]. All of these decisions are motivated by a 

decision to correct an obvious clerical error, rather than to change the 

relationship between the arbitrating parties following the arbitration 

award. 

40.29 ARIAS Forms. The AIDA Reinsurance and Insurance Arbitration 

Society, ARIAS-U.S., is a not-for-profit corporation that promotes the 

improvement of the insurance and reinsurance arbitration process for the 

international and domestic markets. ARIAS-U.S. provides training, conferences 

and workshops to educate prospective arbitrators. ARIAS-U.S. 

also provides a variety of forms related to specific stages of the arbitration 

process that are referenced in its “Practical Guide to Reinsurance Arbitration 

Procedure.” 

ARIAS-U.S. provides the following forms: 

• Application for Certification as an Arbitrator; 

• Application for Qualification as Mediator; 

• Hold Harmless Stipulation; 

• Confidentiality Agreement; 

• Confidentiality Affidavit; 

• Discovery & Briefing Schedule; 

• Order Requiring Respondent to Post Security; 

• Umpire Questionnaire [see § 40.47 below]; 

• Umpire Selection Procedure Request Letter; 

• Neutral Selection Questionnaire; 

• Neutral Selection Procedure Request Letter; 

• Membership Application; and 

• Practical Guide to Reinsurance Arbitration Procedure — Complete 

2004 Revised Edition. 

These forms are available on the ARIAS-U.S. website at www.arias-us.org. 

Lexis.com Search: For information on international reinsurance issues, 



try this source: Global Reinsurance. Enter specific search terms or date 

ranges. 


X. FORMS. 

40.30 BRMA Reinsuring Clause Form 44 C (Quota Share Agreement). 

Use of Form: The wording stipulating the quota share terms is typically 

set forth in the contract’s “Reinsuring Clause,” “Limit and Retention” 

or “Limit of Liability” clause. Several forms are reprinted from the 

Brokers and Reinsurance Markets Association (“BRMA”) Contract 

Reference Book, available at http://www.brma.org/frommembers/ 

frommemcontractwd01.htm. 

Lexis.com Search: For further jurisdiction-specific forms, please see: 

ISO Policy Forms. Enter this search request: reinsurance AND [state]. 

REINSURING CLAUSE 

By this Contract the Company obligates itself to cede to the Reinsurer and 

the Reinsurer obligates itself to accept % quota share reinsurance 

of the Company’s net liability under policies, contracts and 

binders of insurance or reinsurance (hereinafter called “policies”) in force 

at and becoming effective at and after (hour) (date) (year), including 

renewals, and classified by the Company as . 

“Net liability” as used herein is defined as the Company’s gross liability 

remaining after cessions, if any, to . 

The liability of the Reinsurer with respect to each cession hereunder shall 

commence obligatorily and simultaneously with that of the Company, 

subject to the terms, conditions and limitations hereinafter set forth. 

40.31 BRMA Reinsuring Clause Form 44 B (Surplus Share Agreement). 

Use of Form: The details of a surplus share agreement are usually 

contained in the “Reinsuring Clause,” the “Cessions and Limits” or the 

“Business Covered” clause of the contract. 


The Company shall cede to the Reinsurer and the Reinsurer shall accept 

from the Company 100% of the first surplus liability, as hereinafter 

defined, of the Company on risks insured under policies in force at or 

becoming effective or renewed at and after hour (date) (year), covering the 

lines of business set forth below, subject to the terms, conditions and 

limitations hereinafter set forth: 

LINES OF BUSINESS 

A. 



B 

C 

A policy written on an installment premium, report from or continuous 

basis shall be considered renewed as of the end of each annual period 

commencing with the caption date of the policy. 

The term “policies” as used herein means the Company’s binders, policies 

and contracts providing insurance and reinsurance on the lines of business 

covered under this Contract. 

40.32 BRMA Reinsuring Clause Form 61 C (Excess of Loss Agreement). 

Use of Form: The clause defining an excess of loss agreement can be 

called the “Reinsuring Clause,” “Cover Clause,” “Business Reinsured 

Clause” or “Application of Agreement Clause,” and it sets forth the 

type of business covered and the method of determining whether a 

loss falls within the scope of the agreement. “Excess liability” should 

be defined in the contract. 


“By this Contract the Reinsurer agrees to reinsure the excess liability that 

may accrue to the Company under its policies, contracts and binders of 

insurance or reinsurance (referred to herein as “policies”) in force at the 

effective date hereof or issued or renewed on or after that date, and 

classified by the Company as , subject to the terms, conditions 

an limitations hereafter set forth.” 

40.33 BRMA Unauthorized Reinsurance Clause Form 55 A. 

Use of Form: This form applies only to a reinsurer that does not qualify 

for full credit with any insurance regulatory authority having jurisdiction 

over the company’s reserves. The form covers unearned premium, 

outstanding losses and incurred but not reported reserves (“IBNR”). 

UNAUTHORIZED REINSURANCE 

As regards policies or bonds issued by the Company coming within the 

scope of this Contract, the Company agrees that when it shall file with the 

insurance regulatory authority or set up on its books reserves for 

unearned premium and losses covered hereunder which it shall be 

required by law to set up, it will forward to the Reinsurer a statement 

showing the proportion of such reserves applicable to the Reinsurer. The 

Reinsurer hereby agrees to fund such reserves in respect of unearned 

premium, known outstanding losses that have been reported to the 



Reinsurer and allocated loss adjustment expense relating thereto, losses 

and allocated loss adjustment expense paid by the Company but not 

recovered from the Reinsurer, plus reserves for losses incurred but not 

reported, as shown in the statement prepared by the Company (hereinafter 

referred to as “Reinsurer’s Obligations”) by funds withheld, cash 

advances or a Letter of Credit. The Reinsurer shall have the option of 

determining the method of funding provided it is acceptable to the 

insurance regulatory authorities having jurisdiction over the Company’s 

reserves. 

When funding by a Letter of Credit, the Reinsurer agrees to apply for and 

secure timely delivery to the Company of a clean, irrevocable and 

unconditional Letter of Credit issued by a bank and containing provisions 

acceptable to the insurance regulatory authorities having jurisdiction over 

the Company’s reserves in an amount equal to the Reinsurer’s proportion 

of said reserves. Such Letter of Credit shall be issued for a period of not 

less than one year and shall be automatically extended for one year from 

its date of expiration or any future expiration date unless thirty (30) days 

(sixty (60) days where required by insurance regulatory authorities) prior 

to any expiration date the issuing bank shall notify the Company by 

certified or registered mail that the issuing bank elects not to consider the 

Letter of Credit extended for any additional period. 

The Reinsurer and Company agree that the Letters of Credit provided by 

the Reinsurer pursuant to the provisions of this Contract may be drawn 

upon at any time, notwithstanding any other provision of this Contract, 

and be utilized by the Company or any successor, by operation of law, of 

the Company including, without limitation, any liquidator, rehabilitator, 

receiver or conservator of the Company for the following purposes, unless 

otherwise provided for in a separate Trust Agreement: 

(a) to reimburse the Company for the Reinsurer’s Obligations, the 

payment of which is due under the terms of this Contract and which has 

not been otherwise paid; 

(b) to make refund of any sum which is in excess of the actual amount 

required to pay the Reinsurer’s Obligations under this Contract; 

(c) to fund an account with the Company for the Reinsurer’s Obligations. 

Such cash deposit shall be held in an interest bearing account separate 

from the Company’s other assets, and interest thereon not in excess of the 

prime rate shall accrue to the benefit of the Reinsurer; and 

(d) to pay the Reinsurer’s share of any other amounts the Company claims 

are due under this Contract. 

In the event the amount drawn by the Company on any Letter of Credit 



is in excess of the actual amount required for (a) or (c), or in the case of (d), 

the actual amount determined to be due, the Company shall promptly 

return to the Reinsurer the excess amount so drawn. All of the foregoing 

shall be applied without diminution because of insolvency on the part of 

the Company or the Reinsurer. 

The issuing bank shall have no responsibility whatsoever in connection 

with the propriety of withdrawals made by the Company or the disposition 

of funds withdrawn, except to ensure that withdrawals are made only 

upon the order of properly authorized representatives of the Company. 

At annual intervals, or more frequently as agreed but never more 

frequently than quarterly, the Company shall prepare a specific statement 

of the Reinsurer’s Obligations, for the sole purpose of amending the Letter 

of Credit, in the following manner: 

(a) If the statement shows that the Reinsurer’s Obligations exceed the 

balance of credit as of the statement date, the Reinsurer shall, within thirty 

(30) days after receipt of notice of such excess, secure delivery to the 

Company of an amendment to the Letter of Credit increasing the amount 

of credit by the amount of such difference. 

(b) If, however, the statement shows that the Reinsurer’s Obligations are 

less than the balance of credit as of the statement date, the Company shall, 

within thirty (30) days after receipt of written request from the Reinsurer, 

release such excess credit by agreeing to secure an amendment to the 

Letter of Credit reducing the amount of credit available by the amount of 

such excess credit. 

40.34 BRMA Insolvency Clause Form 19 M. 

Use of Form: This Article contains “payable on demand” language in 

the first sentence. Note that it also contains the word “or” rather than 

“and” in the second sentence after “New York Insurance Law,” thus 

making the exceptions to the direct payments to the Company (or its 

liquidator, receiver, conservator or statutory successor) independent of 

each other. The Offset provision in the final paragraph is for this 

Contract only. 

INSOLVENCY 

In the event of the insolvency of the Company, reinsurance under this 

Contract shall be payable on demand, with reasonable provision for 

verification, on the basis of claims allowed against the insolvent Company 

by any court of competent jurisdiction or by any liquidator, receiver, 

conservator or statutory successor of the Company having authority to 


allow such claims, without diminution because of such insolvency or 

because such liquidator, receiver, conservator or statutory successor has 

failed to pay all or a portion of any claims. Such payments by the 

Reinsurer shall be made directly to the Company or its liquidator, receiver, 

conservator or statutory successor, except as provided by Section 4118(a) 

of the New York Insurance Law or except (a) where the Contract 

specifically provides another payee of such reinsurance in the event of the 

insolvency of the Company, or (b) where the Reinsurer with the consent of 

the direct insured or insureds has assumed such policy obligations of the 

Company as direct obligations of the Reinsurer to the payees under such 

policies and in substitution for the obligations of the Company to such 

payees. 

It is agreed, however, that the liquidator, receiver, conservator or statutory 

successor of the insolvent Company shall give written notice to the 

Reinsurer of the pendency of a claim against the insolvent Company on 

the policy or policies reinsured within a reasonable time after such claim 

is filed in the insolvency proceeding and that during the pendency of such 

claim the Reinsurer may investigate such claim and interpose, at its own 

expense, in the proceeding where such claim is to be adjudicated, any 

defense or defenses which it may deem available to the Company or its 

liquidator, receiver, conservator or statutory successor. The expense thus 

incurred by the Reinsurer shall be chargeable, subject to court approval, 

against the insolvent Company as part of the expense of liquidation to the 

extent of a proportionate share of the benefit which may accrue to the 

Company solely as a result of the defense undertaken by the Reinsurer. 

Where two or more reinsurers are involved in the same claim and a 

majority in interest elect to interpose defense to such claim, the expense 

shall be apportioned in accordance with the terms of this Contract as 

though such expense had been incurred by the insolvent Company. 

Should the Company go into liquidation or should a receiver or conservator 

be appointed, all amounts due either Company or Reinsurer, 

whether by reason of premium, losses or otherwise under this Contract, 

shall be subject to the right of offset at any time and from time to time, and 

upon the exercise of the same, only the net balance shall be due. 

40.35 BRMA Offset Clause Form 36 A. 


Use of Form: This is a broad offset clause which permits offset of 

mutual debits and credits across all existing and future reinsurance 

agreements. 

OFFSET 

The Company and the Reinsurer may offset any balance or amount due 



from one party to the other under this Contract or any other contract 

heretofore or hereafter entered into between the Company and the 

Reinsurer, whether acting as assuming reinsurer or ceding company. This 

provision shall not be affected by the insolvency of either party to this 

Contract. 

40.36 BRMA Loss Notice Clause Form 26 B. 

Use of Form: This clause requires the ceding company to provide 

prompt notice of losses and of all subsequent developments. 

LOSS NOTICE 

The Company shall advise the Reinsurer promptly of all losses which, in 

the opinion of the Company, may result in a claim hereunder and of 

subsequent developments thereto which, in the opinion of the Company, 

may materially affect the position of the Reinsurer. 

40.37 Notice of Loss Clause Incorporating Right to Associate. 

Use of Form: This notice of loss clause incorporates the reinsurer’s right 

to associate in the defense of any claim. 

Source of Form: This wording is provided in the Business Insurance 

Law and Practice Guide § 14.08[7] (LexisNexis). 

NOTICE OF LOSS 

Prompt notice shall be given to the Reinsurer by the Company of any 

occurrence or accident which appears likely to involve this reinsurance 

and, while the Reinsurer does not undertake to investigate or defend 

claims or suits, it shall nevertheless have the right and be given the 

opportunity to associate with the company and its representatives at the 

Reinsurer’s expense in the defense and control of any claim, suit or 

proceeding involving this reinsurance, with the full cooperation of the 

Company. 

40.38 BRMA Loss Notice Clause Form 26 A. 

Use of Form: This clause specifies that prompt notice to the reinsurer is 

a condition precedent to recovery. 

LOSS NOTICE 

As a condition precedent to recovery hereunder, the Company shall advise 

the Reinsurer promptly of all losses which, in the opinion of the Company, 

may result in a claim hereunder and of all subsequent developments 

thereto which, in the opinion of the Company, may materially affect the 


position of the Reinsurer. 

40.39 BRMA Access to Records Clause Form 1 B. 

Use of Form: This clause allows the reinsurer or its representative broad 

access to all matters relating to the reinsurance at all reasonable times. 

ACCESS TO RECORDS 

The Reinsurer or its designated representatives shall have free access to 

the books and records of the Company on matters relating to this 

reinsurance at all reasonable times for the purpose of obtaining information 

concerning this Contract or the subject matter hereof. 

40.40 BRMA Confidentiality Clause Form 69 D. 


Use of Form: This clause can be used in conjunction with or added as 

a paragraph of an access to records clause. It allows information 

sharing with other entities if prior consent is obtained. 

CONFIDENTIALITY 

The Reinsurer, except with the express prior written consent of the 

Company, shall not directly or indirectly communicate, disclose or divulge 

to any third party any knowledge or information that may be acquired 

either directly or indirectly as a result of the inspection of the Company’s 

books, records and papers. The restrictions as outlined in this Article shall 

not apply to communications or disclosures that the Reinsurer is required 

to make to its statutory auditors, retrocessionaires, legal counsel or 

arbitrators involved in any arbitration procedures under this Contract, or 

to disclosures required under subpoena or other duly-issued order of a 

court or other governmental agency or regulatory authority. 

40.41 BRMA Claims Cooperation Clause Form 8 A. 

Use of Form: This is a stand-alone claims cooperation clause. Other 

clauses, in conjunction with the notice of loss provision or separately, 

include an admonition that the reinsured (not the reinsurer) has a duty 

to investigate and defend a claim. 

CLAIMS COOPERATION 

When so requested in writing, the Company shall afford the Reinsurer or 

its representatives an opportunity to be associated with the Company, at 

the expense of the Reinsurer, in the defense of any claim, suit or 

proceeding involving this reinsurance, and the Company and the Reinsurer 

shall cooperate in every respect in the defense of such claim, suit or 



proceeding. 

40.42 BRMA Excess of Original Policy Limits Clause Form 15 A. 

Use of Form: This clause is for use in excess of loss contracts where the 

percentage of coverage provided for XPL is specified in the Ultimate 

Net Loss article of the contract. 

EXCESS OF ORIGINAL POLICY LIMITS 

This Contract shall protect the Company, within the limits hereof, in 

connection with ultimate net loss in excess of the limit of its original policy, 

such loss in excess of the limit having been incurred because of failure by 

it to settle within the policy limit or by reason of alleged or actual 

negligence, fraud or bad faith in rejecting an offer of settlement or in the 

preparation of the defense or in the trial of any action against its insured 

or reinsured or in the preparation or prosecution of an appeal consequent 

upon such action. 

However, this Article shall not apply where the loss has been incurred due 

to fraud by a member of the Board of Directors or a corporate officer of the 

Company acting individually or collectively or in collusion with any 

individual or corporation or any other organization or party involved in 

the presentation, defense or settlement of any claim covered hereunder. 

For the purpose of this Article, the word “loss” shall mean any amounts 

for which the Company would have been contractually liable to pay had 

it not been for the limit of the original policy. 

40.43 BRMA Extra Contractual Obligations Clause Form 16 D. 

Use of Form: This clause is for use in a reinsurance contract where the 

percentage of coverage provided for ECO is specified elsewhere in the 

contract. Insurance or other reinsurance recoveries, which protect the 

Company for ECO, shall be deducted when determining the total ECO 

loss under this reinsurance contract. 

EXTRA CONTRACTUAL OBLIGATIONS 

A. “Extra Contractual Obligations” are defined as those liabilities not 

covered under any other provision of this Contract and which 

arise from the handling of any claim on business covered hereunder, 

such liabilities arising because of, but not limited to, the 

following: failure by the Company to settle within the policy 

limit, or by reason of alleged or actual negligence, fraud or bad 

faith in rejecting an offer of settlement or in the preparation of the 

defense or in the trial of any action against its insured or 


einsured or in the preparation or prosecution of an appeal 

consequent upon such action. 

B. The date on which an Extra Contractual Obligation is incurred by 

the Company shall be deemed, in all circumstances, to be the date 

of the original accident, casualty, disaster or loss occurrence. 

C. However, coverage hereunder as respects Extra Contractual Obligations 

shall not apply where the loss has been incurred due to 

the fraud of a member of the Board of Directors or a corporate 

officer of the Company acting individually or collectively or in 

collusion with any individual or corporation or any other organization 

or party involved in the presentation, defense or settlement 

of any claim covered hereunder. 

D. Recoveries from any other form of insurance or reinsurance, 

which protects the company against claims the subject matter of 

this Article, shall inure to the benefit of the Reinsurer. 

40.44 BRMA Intermediary Clause Form 23 A. 

Use of Form: This typical intermediary clause creates an exception to 

the usual agency relationship between an intermediary and the 

reinsured and places the credit risk of the intermediary on the 

reinsurer. 

INTERMEDIARY 

(Intermediary Name) is hereby recognized as the Intermediary negotiating 

this Contract for all business hereunder. All communications (including 

but not limited to notices, statements, premium, return premium, commissions, 

taxes, losses, loss adjustment expense, salvages and loss 

settlements) relating thereto shall be transmitted to the Company or the 

Reinsurer through (Intermediary Name and Address). Payments by the 

company to the Intermediary shall be deemed to constitute payment to the 

Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed 

to constitute payment to the Company only to the extent that such 

payments are actually received by the Company. 

40.45 BRMA Arbitration Clause Form 6 A. 


Use of Form: This clause defines arbitrable matters as “any dispute or 

other matter in question between the Company and the Reinsurer 

arising out of, or relating to, the formation, interpretation, performance, 

or breach of this Contract.” This language is intended to grant 

arbitrators broad authority to hear disputes that could arise under or 



with respect to the contract, including disputes relating to the formation 

and validity of the arbitration clause. The second paragraph 

addresses the situation where more than one reinsurer has taken the 

same position with respect to a dispute with the cedent. Under this 

wording, the reinsurers must consolidate and act jointly for the 

purposes of the arbitration. Parties seeking to avoid mandatory 

consolidation in the event of a dispute can substitute the phrase “may 

consolidate” for “shall consolidate.” This clause also expressly permits 

the parties to agree upon a different location for the hearing from that 

which is specified. In addition, it provides that “[j]udgment on the 

award may be entered in any court having jurisdiction thereof,” which 

paraphrases the language of the FAA, 9 U.S.C § 9, authorizing certain 

courts to confirm an award. 

ARBITRATION 

Any dispute or other matter in question between the Company and the 

Reinsurer arising out of, or relating to, the formation, interpretation, 

performance or breach of this Contract, whether such dispute arises before 

or after termination of this Contract, shall be settled by arbitration. 

Arbitration shall be initiated by the delivery of a written notice of demand 

for arbitration by one party to the other within a reasonable time after the 

dispute has arisen. 

If more than one reinsurer is involved in the same dispute, all such 

reinsurers shall constitute and act as one party for the purposes of this 

Article, provided, however, that nothing herein shall impair the rights of 

such reinsurers to assert several, rather than joint, defenses or claims, nor 

be construed as changing the liability of the Reinsurer under the terms of 

this Contract from several to joint. 

Each party shall appoint an individual as arbitrator and the two so 

appointed shall then appoint a third arbitrator. If either party refuses or 

neglects to appoint an arbitrator within sixty (60) days, the other party 

may appoint the second arbitrator. If the two arbitrators do not agree on 

a third arbitrator within sixty (60) days, of their appointment, each of the 

arbitrators shall nominate three individuals. Each arbitrator shall then 

decline two of the nominations presented by the other arbitrator. The third 

arbitrator shall then be chosen from the remaining two nominations by 

drawing lots. The arbitrators shall be active or retired officers of insurance 

or reinsurance companies or Lloyd’s London Underwriters; the arbitrators 

shall not have a personal or financial interest in the result of the 

arbitration. 

The arbitration hearings shall be held in (City, State), or such other place 


as may be mutually agreed. Each party shall submit its case to the 

arbitrators within sixty (60) days of the selection of the third arbitrator or 

within such longer period as may be agreed by the arbitrators. The 

arbitrators shall not be obliged to follow judicial formalities or the rules of 

evidence except to the extent required by governing law, that is, the state 

of the situs of the arbitration as herein agreed; they shall make their 

decisions according to the practice of the reinsurance business. The 

decision rendered by a majority of the arbitrators shall be final and 

binding on both parties. Such decision shall be a condition precedent to 

any right of legal action arising out of the arbitrated dispute which either 

party may have against the other. Judgment upon the award rendered 

may be entered in any court having jurisdiction thereof. 

40.46 BRMA Arbitration Clause Form 6 E. 


Use of Form: The third paragraph includes the phrase “[a]ll arbitrators 

shall interpret this Contract as an honorable engagement rather than as 

merely a legal obligation,” which has been included in arbitration 

clauses for decades and is sometimes a subject of debate among parties 

to reinsurance agreements [for a discussion of the meaning and import 

of “honorable engagement” language, see § 40.24]. 

ARBITRATION 

As a precedent to any right of action hereunder, if any differences shall 

arise between the contracting parties with reference to the interpretation of 

this Contract or their rights with respect to any transaction involved, 

whether arising before or after termination of this Contract, such differences 

shall be submitted to arbitration upon the written request of one of 

the contracting parties. 

Each party shall appoint an arbitrator within thirty (30) days of being 

requested to do so, and the two named shall select a third arbitrator before 

entering upon the arbitration. If either party refuses or neglects to appoint 

an arbitrator within the time specified, the other party may appoint the 

second arbitrator. If the two arbitrators fail to agree on a third arbitrator 

within thirty (30) days of their appointment, each of them shall name three 

individuals, of whom the other shall decline two, and the choice shall be 

made by drawing lots. All arbitrators shall be active or retired disinterested 

officers of insurance or reinsurance companies or Underwriters at 

Lloyd’s London, not under the control of either party to this Contract. 

Each party shall submit its case to its arbitrator within thirty (30) days of 

the appointment of the third arbitrator or within such period as may be 

agreed by the arbitrators. All arbitrators shall interpret this Contract as an 



honorable engagement rather than as merely a legal obligation. They are 

relieved of all judicial formalities and may abstain from following the 

strict rules of law. They shall make their award with a view to effecting the 

general purpose of this Contract in a reasonable manner rather than in 

accordance with a literal interpretation of the language. 

The decision in writing of any two arbitrators, when filed with the 

contracting parties, shall be final and binding on both parties. Judgment 

upon the award rendered may be entered in any court having jurisdiction 

thereof. Each party shall bear the expense of its own arbitrator and shall 

jointly and equally bear with the other party the expense of the third 

arbitrator and of the arbitration. In the event that two arbitrators are 

chosen by one party as above provided, the expense of the arbitrators and 

the arbitration shall be equally divided between the two parties. Any 

arbitration shall take place in the city in which the Company’s Head Office 

is located unless some other place is mutually agreed upon by the 

contracting parties. 

40.47 ARIAS-U.S. Umpire Questionnaire Sample Form 2.1. 

Use of Form: The AIDA Reinsurance and Insurance Arbitration Society, 

ARIAS-U.S., certifies a pool of qualified arbitrators and serves as a 

resource for parties involved in a dispute to find the appropriate 

persons to resolve the matter in a professional, knowledgeable and 

cost-effective manner. It is common practice for nominated panel 

members to disclose their contacts with the parties (and their counsel 

and any known witnesses) in the business world and in prior 

arbitrations, and with the particular contracts involved in the dispute. 

This proposed disclosure form designed for umpire candidates includes 

a variety of questions that may or may not serve as a basis to 

disqualify a panel member. This form can be tailored for partyarbitrators 

if the parties so desire. 

UMPIRE QUESTIONNAIRE 

In the Matter of the Arbitration Between 


- and - 


, 

Petitioner, 

, 

Respondent 

⎫ 

⎪ 

⎪ 

⎬ 

⎪ 

⎪ 

⎭ 

UMPIRE QUESTIONNAIRE 

To help the parties evaluate the qualifications of umpire nominees in the 

above-captioned arbitration, and to identify any potential conflict of 

interest, please supply the following information: 

1.Name: 

Company: 

Address: 

Telephone: 

Fax: 

Cell Phone: 

Email: 

Home Address: 

Telephone: 

2. EMPLOYMENT HISTORY (please attach a current résumé or CV). 

A. Current Employment (if not apparent from the attached résumé or CV) 

Position Title: 

Length of Employment: 

Principal Duties: 

B. PAST QUALIFYING EMPLOYMENT (if not currently an officer of an 

insurance or reinsurance company [or an Underwriter at Lloyd’s of 

London] and if not apparent from the attached résumé or CV). 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

3. Please provide a copy of your current fee schedule, including any 

refundable or non-refundable retainer. 

4. INSURANCE ARBITRATION EXPERIENCE 



Have you previously participated as an arbitrator or umpire in connection 

with insurance disputes? 

[ ]Yes[ ]No 

If yes, please set forth: 

Number of appearances as an umpire: 

_________________________________________________________________ 

_________________________________________________________________ 

Number of appearances as an arbitrator: 

_________________________________________________________________ 

_________________________________________________________________ 

5. REINSURANCE ARBITRATION EXPERIENCE 

Have you previously participated as an arbitrator or umpire in connection 

with reinsurance disputes? 

[ ]Yes[ ]No 

If yes, please set forth: 

Number of appearances as an umpire: 

_________________________________________________________________ 

_________________________________________________________________ 

Number of appearances as an arbitrator: 

_________________________________________________________________ 

_________________________________________________________________ 

6. POTENTIAL CONFLICTS 

A. Are you presently or have you ever been an employee, officer, director, 

shareholder, agent or consultant of any of the parties listed below, or of the 

parties’ subsidiaries, affiliates or parent companies? [List of all applicable 

parties, subsidiaries, affiliates and parent companies] 

[ ]Yes[ ]No 

If yes, please explain. 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

B. Have you ever served as an arbitrator, umpire, attorney or expert 

witness in a matter involving any of the parties listed above or any 

subsidiaries, affiliates or parent companies of such parties? 



[ ]Yes[ ]No 


_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

C. Have you ever had any involvement in an insurance or reinsurance 

transaction or dispute involving any of the parties, or involving such 

parties’ subsidiaries, affiliates or parent companies? 

[ ]Yes[ ]No 


_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

D. Have you ever had any involvement in an insurance or reinsurance 

transaction or dispute involving any of the specific claims, policies and/or 

treaties at issue in this matter as described in Question 8 below? 

[ ]Yes[ ]No 

_________________________________________________________________ 

_________________________________________________________________ 


_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

E. To your knowledge, do any companies with which you are presently 

affiliated or in which you presently have a financial interest have an 

ongoing business relationship with any of the parties and/or affiliates 

listed above? 

[ ]Yes[ ]No 


_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

EXPERIENCE WITH OTHER PANEL MEMBERS AND PARTIES’ 

COUNSEL 

A. Have you ever served on an arbitration panel with 



[ ]Yes[ ]No 

? 

Name of Arbitrator 

If yes, for each such arbitration, state the approximate date of commencement 

and termination (or whether still pending) and the respective 

capacities in which you and acted, i.e., as 

arbitrator or umpire. 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

B. Have you ever served on an arbitration panel with 

? 

Name of Arbitrator 

[ ]Yes[ ]No 

If yes, for each such arbitration, state the approximate date of commencement 

and termination (or whether still pending) and the respective 

capacities in which you and acted, i.e., as 

arbitrator or umpire. 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

C. Have you ever served as an arbitrator, umpire, expert witness or 

consultant in an arbitration or litigation at the request of any counsel 

involved in this arbitration? [List counsel for all parties] 

[ ]Yes[ ]No 

If yes, identify counsel and disclose type of service and approximate date 

so engaged. 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

D. Have you ever served as an arbitrator, umpire, expert witness or 

consultant in an arbitration or litigation in which any of the above-listed 

counsel represented a party? 

[ ]Yes[ ]No 

If yes, identify counsel and disclose type of service and approximate date 

so engaged. 

_________________________________________________________________ 


_________________________________________________________________ 

_________________________________________________________________ 

8. SUBJECT MATTER OF THE ARBITRATION 

This arbitration involves [insert a neutral description of the dispute 

between the parties] 

_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

Might these facts or circumstances prevent you from rendering an 

unbiased decision in this arbitration? 

[ ]Yes[ ]No 


_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

9. OTHER CONSIDERATIONS 

Are you aware of any facts or circumstances which (1) might impair your 

ability to serve (including schedule availability) or (2) might create an 

appearance of partiality on your part in the above-captioned arbitration? 

[ ]Yes[ ]No 


_________________________________________________________________ 

_________________________________________________________________ 

_________________________________________________________________ 

Signature: 

Date:

Chapter 40 - Understanding Reinsurance

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