Identifying and Handling Potential Reinsurance Coverage Issues

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Identifying and Handling Potential Reinsurance
Coverage Issues
Anthony J. Mormino GE Insurance Solutions
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Potential Reinsurance Coverage Issues

• Most Frequent Issues
• Late Notice
• Exclusion in Reinsurance Contract
• Non-Concurrent Facultative Certificate
• Exclusion in Reinsured Policy
• Ex Gratia Payments
• Aggregation/Number of Occurrences
• Allocation

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Potential Reinsurance Coverage Issues

• Three clauses in reinsurance contract to protect
  Reinsurers rights

• Notice Provision
• Inspection of Records
• Association of Counsel

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Potential Reinsurance Coverage Issues

• Association of Counsel
• Typical Clause
• When requested by the Reinsurer, the Company
  shall permit the Reinsurer, at the expense of the
  Reinsurer, to be associated with the Company in
  the defense or control of any claim, loss or
  legal proceeding which involves or is likely to
  involve the Reinsurer.

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Association of Counsel

• When should Reinsurer consider Association of
  Counsel?

• Large and/or complicated claim where ceding
  company is in over its head.
• Reinsurer disagrees with ceding companies claim
  handling.
• There is a coverage issue in the claim which may
  affect reinsurance coverage.
• Ceding company is not adequately protecting
  reinsurance interest or providing sufficient
  information on the progress of the claim.

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Association of Counsel

• Usually viewed by ceding company as an
  adversarial tactic so used rarely.
• Association on a consultative basis.
• Association as a defensive measure.

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Late Notice

• Two Questions

1. Is notice late?
a. Reporting Requirements

• Reserved at 50 of retention
• Any claim which in the Companys estimate of the
  value of injuries or damages sought might result
  in a judgment sufficient to involve this
  certificate.
• Specified injury criteria.

b. Facts of the case.
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Late Notice
2. What is the effect of late notice on the
reinsurer?

• Condition precedent to coverage
• Prejudice

• Substantial economic harm (2d Circuit).
• Could have changed the outcome (9th Circuit).

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Late Notice

• Proof of Prejudice Requires a Factual
  Investigation

• Case could have been settled for less.
• Tax loss.
• Underwriting/Pricing decisions.
• No opportunity to associate.
• Jeopardize retrocessional recovery.

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Reinsurance Contract Issues

• Just because policy is reinsured, doesnt mean
  that the specific loss is covered.

• Treaty Exclusions.
• Non-Concurrent Facultative Certificates.

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Reinsured Policy Issues

• Payment of Claim not covered under reinsured
  policy.

-- Compromise of disputed coverage issue.
-- Deliberate. -- Inadvertent.

• Example Nationwide v. American Re.

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Aggregation

• The question is when, if at all, can multiple
  claims paid by the ceding company be aggregated
  into one occurrence for the purpose of
  reinsurance recovery.

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Aggregation

• Types of Reinsurance Contracts Affected

• Non-proportional per occurrence reinsurance
  (excess of loss).
• Proportional reinsurance (quota share) written on
  excess policies attaching over per occurrence
  primary policies.

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Aggregation

• Types of Claims

• Products liability asbestos, DES, fire
  retardant plywood.
• Completed Operations construction defects.
• Premises liability lead paint, chemical
  exposure, pollution.
• Operations pollution, asbestos, sexual
  molestation.
• Professional Liability.
• First Party Property.
• Employment Practices discrimination, sexual
  harassment.

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Aggregation

• The reinsurance contract is a separate and
  distinct contract with its own individual terms
  and conditions.
• Thus, the definition of occurrence and the
  application of limits and retentions may differ
  substantially from those clauses in the original
  policy
• so

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Aggregation
Regardless of how the cedent pays the underlying
claims of its policyholder under the terms of the
original policy, the number of occurrences for
reinsurance purposes should be determined by the
definition of occurrence in the reinsurance
contract.
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Treaty Definition of Occurrence
Aggregation

• Occurrence shall mean any one accident or
  occurrence or series of accidents or occurrences
  arising out of one event.
• Occurrence shall mean each and every accident,
  disaster, casualty or happening or series of
  accidents, disasters, casualties or happenings
  arising out of one event.
• All losses having a common origin and/or
  traceable to the same act, omission, mistake,
  occurrence or causative incident shall be
  considered as arising out of one occurrence.

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Aggregation
Division of Authority Regarding Event

• Authority supporting narrow (i.e., multiple
  occurrence) construction of event.

• Babcock Wilcox Co. v. Arkwright-Boston
  Manufacturing Mutual Ins. Co., 53 F.3d 762 (6th
  Cir. 1995) (asbestos original policies).
• Ruthardt v. Underwriters at Lloyds, London, No.
  91-7877C (Mass. Super. Ct. Mar. 12, 1998)
  (asbestos reinsurance treaties)
• Travelers Casualty Surety Co. v. Certain
  Underwriters at Lloyds, 96 N.Y. 2d 583 (N.Y. Ct.
  App. 2001) (environmental claims at multiple
  sites held to be multiple occurrences under
  common origin definition of occurrence in
  treaty)

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Aggregation

Division of Authority Regarding Event

• Authority supporting broad (i.e., single
  occurrence) construction of event.

• Canadian General Ins. Co. v. Underwriting Members
  of Lloyds (Oct. 4, 1990) (reinsurance
  arbitration) policyholders continuous failure to
  put warning on raw asbestos supplied to
  manufacturers from 1959 to 1974 could constitute
  one event.
• International Surplus Lines Ins. Co. v. Certain
  Underwriters at Lloyds, London, 868 F. Supp. 917
  (S.D. Ohio 1994) (asbestos products claims held
  to be one occurrence under reinsurance contract).
  

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Aggregation
Causation-Based Wordings

• Several English cases support interpreting
  causation-based occurrence definitions in
  reinsurance contracts more broadly than
  event-based definitions.

• Municipal Mutual Ins. Ltd. v. Sea Ins. Co. Ltd.
  (U.K. Ct. of Appeal, Mar. 26, 1998) (property
  damage due to vandalism original policies)
• Axa Reins. Ltd. v. Field (U.K. House of Lords,
  June 20, 1996) (EO reinsurance treaties
  originating cause wording opens up the
  widest possible search for an unifying factor)

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Aggregation
Aggregate Extension Clauses

• Typical Example
• As regards liability incurred by the reassured
  for losses on risks covering on an aggregate
  basis, this reinsurance shall protect the
  reassured excess of the amounts as provided
  herein in the aggregate any one such aggregate
  loss up to the limit of indemnity as provided for
  herein in all any one such aggregate loss.

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Aggregation
Aggregate Extension Clauses

• Functions Purpose
• Designed to apply to reinsured policies with an
  aggregate limit, i.e., products and completed
  ops.
• Allows aggregation of claims to satisfy per
  occurrence retention.
• Expansion of reinsurance coverage for cedent
  whereas as aggregate limit in reinsured policy is
  a restriction on coverages to the policyholder.

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Allocation
Issues arise when policyholder asserts claims
against the ceding company for coverage of
numerous claims, or one continuous occurrence
type claim, under several policies spanning
multiple years. Issues may also arise when the
ceding company insures more than one defendant
under different policies in a claim or lawsuit.
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Allocation
Types of Reinsurance Affected All proportional
and non-proportional reinsurance.
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Allocation
Types of Claims

• Latent bodily injury asbestos, DES, lead paint,
  chemical exposure, silicosis.
• Progressive property damage construction
  defects, pollution.
• Repetitive trauma sexual molestation.
• Continuous exposure pollution, chemical,
  employment discrimination, sexual harassment.

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• Notification of Coverage Issues to the
• Ceding Company
• Reservation of Rights Letter
• Denial of coverage or disclaimer letter.