Chapter 5 Common Reinsurance Treaty Clauses, Part II

These flashcards cover common reinsurance treaty clauses, termination types, and ancillary agreements discussed in Chapter 5, Part II.

Commencement and termination clause

A clause that states the reinsurance treaty’s duration and the specific circumstances that would trigger its termination.

Continuous contract

A contract that continues in force until terminated, usually requiring ninety days’ notice for cancellation at specific intervals (any time, quarterly, semiannually, or annually).

Term contract

A contract with specific effective and expiration dates that generally does not terminate until the expiration date, unless there is mutual agreement.

Run-off basis

A termination basis where the reinsurer retains unearned premiums and remains liable for covered losses until the expiration of the primary insurance policies.

Cut-off basis

A termination basis where unearned premiums are returned to the primary insurer, and the primary insurer has no further reinsurance protection for new losses arising from those policies.

Sudden death provision

A provision that allows the reinsurer to cancel a treaty on a cut-off basis if specific events occur, such as a change in management, financial impairment, or insolvency of the primary insurer.

Special termination clause

A clause similar to a sudden death provision except that either the reinsurer or the primary insurer has the option of terminating the treaty if specific criteria are met.

Nonpayment of balances provision

A clause providing the reinsurer a contractual right to cancel the treaty on a cut-off basis if the primary insurer fails to pay owed balances in a timely fashion.

Reports and remittances clause

A clause requiring the primary insurer to submit information to the reinsurer to calculate net balances owed and complete financial statements.

Excess of policy limits (XPL) clause

A clause requiring the reinsurer to indemnify the primary insurer for damages awarded over policy limits due to the primary insurer’s bad faith, fraud, or gross negligence.

Extra-contractual obligations (ECO) clause

A clause requiring the reinsurer to indemnify the primary insurer for damages that go beyond the scope of the underlying policy coverage due to bad faith, fraud, or gross negligence in claim handling.

Territory clause

A clause defining the geographic area where loss exposures must be located to be covered by the reinsurance treaty.

Self-insurer obligations clause

A clause extending the treaty to include policies the primary insurer issues for its own loss exposures, treating them as though they were for an unaffiliated insured.

Special acceptance agreement

An agreement used in treaties with multiple reinsurers to allow exceptions to treaty exclusions, often authorized by a lead reinsurer.

Cut-through endorsement

An endorsement giving the insured a direct cause of action against the reinsurer for the reinsured amount if the primary insurer becomes insolvent.

Guarantee endorsement

Also known as a mortgagee endorsement; it allows an insured to recover the entire covered loss from the reinsurer, regardless of how much was reinsured.

Indemnity agreement

Also called a hold-harmless agreement, it is executed by co-reinsurers to pay their proportionate share of losses to the lead guarantor named in a cut-through or guarantee endorsement.