Convención Anual de Seguros of the abcde Mexican Association of Insurers (Asociación Mexicana de Instituciones de Seguros - AMIS) June 9 th & 10 th 2008 "Cooperation" in Settling Claims The Relationship between Cedents and Reinsurers Dr. Wolfgang Eilers Chiltington International GmbH, Germany 1 "Cooperation" in Settling Claims AMIS June 10th, 2008
"Cooperation" in Settling Claims - Agenda 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 2 "Cooperation" in Settling Claims AMIS June 10th, 2008
Agenda abcde 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 3 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (1) What are the options? Claims Notification Clause Claims Assistance Clause Claims Coordination Clause Claims Control Clause 4 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (2) 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! 5 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (2) 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... 6 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (3) 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 7 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (4) 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... 8 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (5) 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. grouprelated insurance companies, e.g. bank-assurance) 9 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (6) 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) 10 "Cooperation" in Settling Claims AMIS June 10th, 2008
Claims Cooperation Clauses (6) 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) 11 "Cooperation" in Settling Claims AMIS June 10th, 2008
Agenda Claims Cooperation Clauses abcde 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 12 "Cooperation" in Settling Claims AMIS June 10th, 2008
Other Clauses (1) 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 13 "Cooperation" in Settling Claims AMIS June 10th, 2008
Other Clauses (2) 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 14 "Cooperation" in Settling Claims AMIS June 10th, 2008
Other Clauses (3) 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 15 "Cooperation" in Settling Claims AMIS June 10th, 2008
Other Clauses (4) 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. 16 "Cooperation" in Settling Claims AMIS June 10th, 2008
Other Clauses (5) 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 17 "Cooperation" in Settling Claims AMIS June 10th, 2008
Agenda Claims Cooperation Clauses abcde 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 18 "Cooperation" in Settling Claims AMIS June 10th, 2008
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. 19 "Cooperation" in Settling Claims AMIS June 10th, 2008
Jurisdiction in the Different Countries AIG Europe v Faraday [2007] (2) Appropriateness of Clauses 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 20 "Cooperation" in Settling Claims AMIS June 10th, 2008
Jurisdiction in the Different Countries AIG Europe v Faraday [2007] (3) Appropriateness of Clauses 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 21 "Cooperation" in Settling Claims AMIS June 10th, 2008
Jurisdiction in the Different Countries 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 3 rd 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. 22 "Cooperation" in Settling Claims AMIS June 10th, 2008
Jurisdiction in the Different Countries 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 23 "Cooperation" in Settling Claims AMIS June 10th, 2008
Jurisdiction in the Different Countries 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. 24 "Cooperation" in Settling Claims AMIS June 10th, 2008
Jurisdiction in the Different Countries 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 25 "Cooperation" in Settling Claims AMIS June 10th, 2008
Jurisdiction in the Different Countries and so on and so on and so on 26 "Cooperation" in Settling Claims AMIS June 10th, 2008
Agenda Claims Cooperation Clauses abcde 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 27 "Cooperation" in Settling Claims AMIS June 10th, 2008
Specific Challenges in Latin America (1) are there any? 28 "Cooperation" in Settling Claims AMIS June 10th, 2008
Specific Challenges in Latin America (2) 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 29 "Cooperation" in Settling Claims AMIS June 10th, 2008
Agenda Claims Cooperation Clauses abcde 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 30 "Cooperation" in Settling Claims AMIS June 10th, 2008
Excursus: Contract Certainty (1) 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 31 "Cooperation" in Settling Claims AMIS June 10th, 2008
Excursus: Contract Certainty (2) 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! 32 "Cooperation" in Settling Claims AMIS June 10th, 2008
Excursus: Contract Certainty (3) 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! 33 "Cooperation" in Settling Claims AMIS June 10th, 2008
Agenda Claims Cooperation Clauses abcde 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 34 "Cooperation" in Settling Claims AMIS June 10th, 2008
Risk Management Aspects (1) Areas of Preventive Actions / Focus / Action Planning Wording & Clauses Underwriting incl. Accumulation Control Claims Management and Claims Reporting Arbitration / Litigation Support 35 "Cooperation" in Settling Claims AMIS June 10th, 2008
Risk Management Aspects (2) 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 36 "Cooperation" in Settling Claims AMIS June 10th, 2008
Risk Management Aspects (3) 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... 37 "Cooperation" in Settling Claims AMIS June 10th, 2008
Risk Management Aspects (4) 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... 38 "Cooperation" in Settling Claims AMIS June 10th, 2008
Chiltington Hamburg References PAVANT INTERNATIONAL RE 39 "Cooperation" in Settling Claims AMIS June 10th, 2008 39
Chiltington South America References 40 "Cooperation" in Settling Claims AMIS June 10th, 2008 40
"Cooperation" in Settling Claims 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 Any Questions 41 "Cooperation" in Settling Claims AMIS June 10th, 2008
Contact details Chiltington International GmbH Halstenbeker Weg 96a 25462 Rellingen Germany Chiltington Internacional S.A. de CV G. Gonzalez Camarena 1450 piso 2.- Centro Ciudad Sta Fe México, 1210 DF Dr. Wolfgang Eilers + 49 4101 471 100 + 49 4101 471 298 weilers@chiltington.com Oscar Botello Moreno + 52 55 11 05 05 96 + 52 55 11 05 05 53 obotello@chiltington.com.mx www.chiltington.com 42 "Cooperation" in Settling Claims AMIS June 10th, 2008
Disclaimer 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. 43 "Cooperation" in Settling Claims AMIS June 10th, 2008
abcde Thank you for your attention! Dr. Wolfgang Eilers Chiltington International GmbH, Germany 44 "Cooperation" in Settling Claims AMIS June 10th, 2008 Consultancy of the Year 2006 Providing Services to the Insurance & Reinsurance Industry