Facultative reinsurance and the full reinsurance clause

Abstract

The Full Reinsurance clause by which a reinsurer agrees to be bound by the same terms and conditions as the original policy and commits to follow the reinsured’s settlements is widely used in London Market facultative reinsurance contracts. In most disputes the outcome depends upon resolving the fundamental question of whether reinsurance is either a further insurance on the subject matter insured or is a reinsurance of the liability of the reinsured under the direct policy. The interpretation of the clause had not been settled until the recent House of Lords decision on Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40 where their Lordships adopted the view that reinsurance is not a liability insurance but a further insurance on the subject matter insured by the reinsured. Settlement clauses are also widely used in the United States, albeit with wording slightly different from that of the full reinsurance clause but there is broad consensus in the US courts that the words ‘follow the fortunes’ and ‘follow the settlements’ are interchangeable. There are both similarities and differences between the two common law systems: in England the full reinsurance clause has to be express, whereas in the US there is a debate as to whether it may be implied; in England the nature of reinsurance remains unresolved, in the US the liability approach has been adopted; post-settlement allocations have created huge problems in the US but have scarcely been discussed in England; the US cases have not proceeded on the basis of incorporation whereas in England the scope of incorporation has been much discussed. These differences arise mainly from the understanding of reinsurance in the two systems, and the present thesis aims to explain these conflicting understandings by describing the relationship between reinsurers and reinsureds in the light of ‘as original’, ‘follow the form’ and ‘settlement’ clauses.

More information

Identifiers

Catalogue record

Export record