cooperation' in settling claims - the relationship...

It‘s clear from our perspective...1 "Cooperation" in Settling Claims — AMIS — June 10th, 2008

"Cooperation" in Settling Claims

The Relationship between

Cedents and Reinsurers

"Cooperation" in Settling Claims "Cooperation" in Settling Claims

The Relationship between The Relationship between

Cedents and ReinsurersCedents and Reinsurers

Dr. Wolfgang Eilers

Chiltington International GmbH, Germany

Dr. Wolfgang Eilers

Chiltington International GmbH, Germany

abcdeConvención Anual de Seguros

of the

Mexican Association of Insurers

(Asociación Mexicana de Instituciones de Seguros - AMIS)

June 9th & 10th 2008

Convención Anual de Seguros

of the

Mexican Association of Insurers

(Asociación Mexicana de Instituciones de Seguros - AMIS)

June 9th & 10th 2008


"Cooperation" in Settling Claims - Agenda

2

• Claims “Cooperation” Clauses

• Other Clauses

• No Specific Clause at All

• Follow the Settlement

-> Excursus: Ex Gratia, Extra Contractual Obligation (ECO) &

Negligence of the Cedent

• Full Reinsurance Clause

• Jurisdiction in the Different Countries

• Specific Challenges in Latin America

• Excursus: “Contract Certainty”

• Risk Management Aspects


Agenda


• Other Clauses:










abcde


Claims “Cooperation” Clauses (1)

4

What are the options ?

• Claims Notification Clause

• Claims Assistance Clause

• Claims Coordination Clause

• Claims Control Clause



5

Claims Notification Clause (Example “Property”)

“A condition precedent to any liability of the Reinsurer under

this Agreement is that the Company shall notify the Reinsurer

of any claim for which provisional claims advice is stipulated

within 72 hours of gaining knowledge of the claim and shall

furnish the Reinsurer with all essential information about the

claim, particularly with regard to its estimated amount,

probable cause and planned settlement.”

=> To be generally found in any reinsurance agreement

and indispensable to be agreed upon next to on any

Claims “Cooperation Clause !



6

Claims Assistance Clause (Example)

“…The Reinsurer shall have the right to participate, in an

internal advisory capacity and at its own expense, in the

settlement of claims for which separate claims notifications

are stipulated in the Schedule, and also to participate in

decisions regarding the legal defence of such claims. For this

purpose the Reinsurer may demand all relevant information

on the claim and its settlement or de-fence. Beyond this, the

Reinsurer may at its own expense and in agreement with the

Company, commission a loss adjustment firm or delegate a

legitimate representative to keep it informed of the course of

the settlement procedure...”



7

Claims Coordination Clause (Example)

“…A condition precedent to any liability of the Reinsurer under this

Agreement is that the Company shall cooperate with the Reinsurer

in the settlement of claims for which separate claims notifications

are stipulated in the Schedule. This shall mean that from the time it

gains knowledge of the loss occurrence, the Company shall keep the

Reinsurer informed about the development of the claims and the

proposed settlement, including their legal defence. The Reinsurer

shall have the right to give internal advice and to request any

relevant information. The Reinsurer shall bear the cost of its own

involvement in the settlement.

Moreover, the Reinsurer may require that the Company, after

consultation with the Reinsurer, appoint a recognised firm of

independent loss adjusters and that it be kept informed of the

progress of the settlement and/or be given the opportunity to take

part, at its own expense, in the settlement of the claims by

delegating a duly authorised representative…”



8

Claims (Settlement) Control Clause (Example)

“…A condition precedent to any liability of the Reinsurer under

this Agreement is that the Company, before making final

settlement of claims for which separate claims notifications are

stipulated in the Annexes, shall have submitted the relevant

documents to the Reinsurer and shall have obtained the

Reinsurer's consent.

Moreover, the Reinsurer may require that the Company, after

consultation with the Reinsurer, appoint a recognised firm of

independent loss adjusters and that it be kept informed of the

progress of the settlement and/or be given the opportunity to

take part, at its own expense, in the settlement of the claims

by delegating a duly authorised representative...”



9

Reasons for Claims “Cooperation” Clauses

• Leading Reinsurer

• Large, lion’s share participation

• Excess of Loss Reinsurance, where the cedent has no

participation in the liability above the priority.

• Dependence resp. interrelation of the cedent to the

insured or a third party profiting from the insurance

cover (e.g. captive business, in-house resp. group-

related insurance companies, e.g. bank-assurance)



10

Reasons for Claims “Cooperation” Clauses (cont.)

• Participation in heavy and/or very specific or unusual

risks or reinsurance constructions

• Fronting arrangements where the expertise of the

fronting company is not ensured

• Where broker covers are also included in the

reinsurance agreement

• Reinsurer’s support necessary on behalf of the cedent

(e.g. new-business support / set-up of new operation)



11

Advantages & Disadvantages for the Cedent & Reinsurer

• Rights for cooperation

• Obligation to cooperation

• Within the different relationships

• Inter-partes (i.e. cedent/reinsurer)

• Intra-partes (i.e. cedent/(co-)insurer resp. reinsurer/(co-)

reinsurer)


Agenda


• Other Clauses:• No Specific Clause at All


-> Excursus: Ex Gratia, Extra Contractual Obligation

(ECO) & Negligence of the Cedent






abcde


Other Clauses (1)

13

No Specific Clause at all:

• Cedent has the right to settle the claim

• Reinsurer “has the right to settle the claim”, i.e. to

assess its own liability

• Discussion whether there is “follow the fortune” as

an implied term in the reinsurance agreement


Other Clauses (2)

14

Follow the Fortune/Follow the Settlement/Follow the Actions

• Is there a difference ?

• Generally obliges a reinsurer to pay if within the terms and

conditions of the original policy and the reinsurance agreement.

• The refusal of the reinsurer to follow the actions in respect of

contractually covered risks, is a serious measure which, even if the

withholding of performance is justified, may easily be interpreted

in the market as "harsh" or as an "excuse for reluctance to pay".

• Reasons for declining indemnity:

• Cedent’s business management shows gross infringements of

recognised standards of conduct in (primary) insurance.

• Lack of obligation to follow and no obligation to indemnify as

outside of the scope of cover resp. contractually excluded


Other Clauses (3)

15

Follow the Fortune/Follow the Settlement/Follow the Actions (cont.)

…and its relation to claims “co-operation” clauses ?

• Underlying philosophy of a

• Follow the settlement clause: Reinsurer trusts cedent to make

settlements

• Claims “co-operation” clauses is that settlements should not be

made without reinsurers’ prior approval.

• Tension -> ref. made to SCOR case [1985] -> see further below.

• Practical Consequence:

• Ensure an early and on-going dialogue with the reinsurers about

handling claims

• Safest course of action is for the reinsured not to agree a

(compromise) settlement and wait to be sued by the insured


Other Clauses (4)

16

Excursus: Ex Gratia, Extra Contractual Obligation (ECO) &

Negligence - Is there the obligation to Follow the Fortune ?

• Ex Gratia: No obligation to follow as any payment by the

cedent is done knowing the non-existence of the this related

obligation and only done due to management or other

similar reasons.

• Extra Contractual Obligation (ECO): No obligation to follow

as any (obligation for) payment on behalf of the cedent is

outside of the scope of the reinsurance agreement.

• Negligence on behalf of the Cedent: No obligation to follow

as this obligation is limited by the obligation of the cedent to

management in a business like manner.


Other Clauses (5)

17

Full Reinsurance Clause

• Usually taken to mean “being a reinsurance of and

warranted same gross rate, terms and conditions as

original”

• Therefore no issue i.r.o. claims “cooperation”

between cedent and reinsurer but as to the question

of “back-to-back”-cover

• The reinsurers rights for claim cooperation as agreed

upon are not curtailed by a “full reinsurance” clause


Agenda


• Other Clauses:










abcde


Jurisdiction in the Different Countries

AIG Europe v Faraday [2007] (1) — Appropriateness of Clauses

The Case

• Facultative reinsurance of AIG in respect of a D&O policy issued

to the original insured

• Claim related to a class action in the US vs. the original insured.

• After insurer’s settlement according to the limit of liability

under the original policy, AIG notified reinsurer and sought

recovery.




The Reinsurance Claims Co-operation Clause

“…Notwithstanding anything contained herein to the contrary, it is

a condition precedent to any liability under this Policy that:

• The Reinsured shall upon knowledge of any loss or losses

which may give rise to a claim, advise the Reinsurers thereof

as soon as is reasonably practicable and in any event within 30

days

• The Reinsured shall furnish the Reinsurers with all information

available respecting such loss or losses, and shall co-operate

with the Reinsurers in the adjustment and settlement

thereof…“




Crucial Points

• Problem: Use of a property claims cooperation clause in a

liability reinsurance wording (“loss” = “actual loss” = “proven

fact”)

• Clear illustration of standard clauses not to be applied to

reinsurance wordings on a “one size fits all” basis.

• Any amendments to standard clauses should be checked to

ensure interpretation as intended.

• Necessary appropriateness especially

• For the specific class of business, and

• In consistence with the remainder of the contract wording.

• Better to use the word “circumstances” than “loss”



Dornoch vs. Royal & Sun Alliance [2004] — “Loss” or “Actual Loss”?

• Claims Cooperation Clause: 72h notification period for a liability

policy.

• Court interpretation: “actual loss”, which the cedent could not be

expected to have in such a short period.

• Court of Appeal: no breach of the notification clause, as cedent did

not have actual knowledge of actual losses suffered by the 3rd party

claimants vs. the original insured, and would not do so until those

claims had been decided by a court.

• Root cause of the problem:

• Complete mismatch between the notification provisions in the

insurance and those in the reinsurance

• Use of an off-the-shelf clause in the reinsurance that would have

been more suitable for property damage — rather than liability -

cover.



Gan vs. Tai Ping [2001] — Importance of specific words

Claims Control Clause provided: “...condition precedent to liability that

no settlement and/or compromise shall be made and liability admitted

without prior approval of reinsurers”

The Court of Appeal established

• That “and” meant “or”

• That the Follow the Settlement clause would take effect subject

to compliance with the Claims Cooperation Clause

• Compliance as condition precedent to liability effectively enabling

the reinsurer to decide whether or not to settle a claim, provided

that the reinsurer act reasonably in deciding whether or not to

withhold their approval

=> The Claims Cooperation Clause required strict compliance on

insured’s part to render the reinsurer liable to indemnify



24

Shinnedean Ltd. vs. Alldown Demolition [2005] — How

Condition Precedent Co-operation Provisions to be Construed

• If a co-operation clause is a condition precedent, then the

breach of that clause will allow reinsurer to decline cover even

if there has been no prejudice. Question: when is there a

breach?

• If a co-operation clause does not specify how long a cedent has

to provide claims information, a "reasonable time" will be given,

to be determined on the facts of the case.

• A reinsurer is entitled to relevant claims material in good time

to assess a claim, whether or not his position is prejudiced.



25

SCOR [1985] - Tension between the Claims Cooperation and

Follow the Fortune clauses

• The court came to the conclusion “to treat the follow the

settlements clause as applicable only to such settlements as

are approved by the reinsurers”

Practical Consequence:

• Ensure an early and on-going dialogue with the reinsurers

about handling claims

• Safest course of action is for the cedent not to agree a

(compromise) settlement and wait to be sued by the insured



26

…and so on…

…and so on…

…and so on…


Agenda


• Other Clauses:

• No Specific Clause at all







• Excursus: ”Contract Certainty”


abcde


Specific Challenges in Latin America (1)

28

…are there any ?


Specific Challenges in Latin America (2)

29

“Specifics” given:

• Role of brokers and sub brokers in the notification

• Knowledge by adjusters / surveyors / representatives of the

reinsurers

• Size of a loss may not exceed deductible when the reinsured first

becomes aware of it

• Reinsurers may take longer time than necessary to agree a

settlement

• Local cedants often think only on the “follow the fortunes” principle

=> Very general topics of utmost importance


Agenda


• Other Clauses :










abcde


Excursus: “Contract Certainty” (1)

31

London Market Contract Certainty Code of Practice:

“Contract certainty is achieved by the complete and

final agreement of all terms between the original

insured and insurer (resp. insurer (cedent) and

reinsurer) by the time that they enter into the contract,

with contract documentation provided promptly

thereafter”



Implications of “Contract Certainty” for the time being:

• For the London Market:

• Contracts to be final and certain on their effective date.

• Terms must be clearly expressed including any conditions or

subjectivities.

• Contract changes to be certain and documented promptly.

• For other Markets: “very limited”

• “Best Practice”

• Where the business is placed with London Market -> Getting

the Reinsurance Wordings “in time” !



Implications of “Contract Certainty” in the future:

• For the London Market:

• Contracts to be final and certain on their effective date.

• Terms must be clearly expressed including any conditions or

subjectivities.

• Contract changes to be certain and documented promptly.

• For other Markets: “very limited”

• “Best Practice”

• Where the business is placed with London Market -> Getting

the Reinsurance Wordings “in time” !


Agenda


• Other Clauses:










abcde


Risk Management Aspects (1)

35

Areas of Preventive Actions / Focus / Action Planning

• Wording & Clauses

• Underwriting incl. Accumulation Control

• Claims Management and Claims Reporting

• Arbitration / Litigation Support



Wordings, Clauses and the Underwriting Team in general:

• Review of existing wordings with special focus on (i.a.):

• Claims Notification and Cooperation Clauses

• Follow the Fortune & Full Reinsurance Clause (“Back-to-

Back” Cover)

• Applicable law and jurisdiction Clause ?

• Well drafted and communicated underwriting guidelines

• Review of the decision making processes in respect of

wordings (i.a. also: “double-check”-principle)

• Training of underwriters



Claims Management and Claims Reporting

• Well drafted and communicated claims handling/management

and reporting guidelines (e.g. who names and instructs

assessors, surveyors, adjusters?)

• Claims handler awareness of notification periods and triggers,

as well as accumulation control

• Defined in-house and outside reporting lines

• Every big event should trigger careful analysis.

• Review of the claims handling and settlement decision making

processes (i.a. also: “double-check”-principle)

=> Do not wait until it is too late...



Arbitration / Litigation Support

• Seat of Arbitration

• Choice of Law

• Overview on who to choose (for the different lines of

business):

• As representing lawyer

• As party’s arbitrator

• Suggestions for the umpire

=> Do not wait until the arbitration request comes in...


PAVANT INTERNATIONAL RE

Chiltington Hamburg References

39


Chiltington South America References

40



• Other Clauses



-> Excursus: Ex Gratia, Extra Contractual Obligation

(ECO) & Negligence of the Cedent






"Cooperation" in Settling Claims

41

Any Questions


Contact details

Chiltington International GmbH

Halstenbeker Weg 96a

25462 Rellingen

Germany

Dr. Wolfgang Eilers

+ 49 4101 471 — 100

+ 49 4101 471 — 298

[email protected]

Chiltington Internacional S.A. de CV

G. Gonzalez Camarena 1450 piso 2.-

Centro Ciudad Sta Fe

México, 1210 DF

Oscar Botello Moreno

+ 52 55 11 05 05 — 96

+ 52 55 11 05 05 — 53

[email protected]

www.chiltington.com


Disclaimer

43

The information provided in this presentation does in no way

whatsoever constitute legal, accounting, tax or other professional

advice.

While Chiltington International has endeavoured to include in this

presentation information it believes to be reliable, complete and

up-to-date, the company does not make any representation or

warranty, express or implied, as to the accuracy, completeness or

updated status of such information.

Therefore, in no case whatsoever will Chiltington International

and/or its affiliate companies be liable to anyone for any decision

made or action taken in conjunction with the information in this

presentation or for any related damages.


Thank you for your

attention !

Thank you for your Thank you for your

attention !attention !

abcde

“Consultancy of the Year 2006”

Providing Services to the

Insurance & Reinsurance Industry

Dr. Wolfgang Eilers

Chiltington International GmbH,

Germany

Dr. Wolfgang Eilers

Chiltington International GmbH,

Germany

cooperation' in settling claims - the relationship...

Documents