Chapter 5 Common Reinsurance Treaty Clauses, Part II
Commencement and Termination Clause
This clause establishes the reinsurance treaty’s duration, basis of attachment, and triggers for termination.
Coverage typically commences at standard time. The applicable time zone varies by treaty type:
Pro rata/Excess of loss property: Location of the loss exposures.
Casualty excess of loss: Mailing address of the named insured.
Clash cover/Catastrophe treaties: Primary insurer’s home office.
Continuous Contracts: These remain in force until terminated, usually requiring a notice period of days.
Term Contracts: These cover a specific period (e.g., to ) and generally do not provide run-off coverage upon expiration.
Termination Basis and Cancellation
Run-off Basis: The reinsurer stays liable for losses on in-force policies until they expire, retaining the unearned premium.
Cut-off Basis: The reinsurer returns unearned premiums to the primary insurer and ceases liability for new losses immediately at termination.
Cancellation Triggers: Treaties can be terminated via formal notice, mutual consent, state-mandated liquidation, or nonpayment of balances.
Sudden Death Provision: Allows the reinsurer to cancel immediately on a cut-off basis due to specific events, including:
Changes in primary insurer ownership, management, or control.
Reduction in paid-in capital or policyholders’ surplus.
Insolvency or reduction of the primary insurer’s net retention.
Specialized Coverage Clauses
Excess of Policy Limits (XPL): Requires the reinsurer to indemnify for damages awarded against the primary insurer (due to bad faith, fraud, or gross negligence) that exceed the original policy limits but would have been covered if limits were higher.
Extra-Contractual Obligations (ECO): Indemnifies the primary insurer for damages awarded for bad faith or negligence in claim handling that go beyond the scope of the underlying policy coverage.
Territory Clause: Specifies the geographic boundaries within which loss exposures must be located to qualify for coverage.
Self-Insurer Obligations Clause: Extends the treaty to include the primary insurer’s own loss exposures, treating them as if they were for an unaffiliated insured.
Reporting and Ancillary Agreements
Reports and Remittances Clause: Obligates the primary insurer to provide data for balance calculations and financial statements; pro rata treaties generally require more detailed reporting than excess of loss treaties.
Special Acceptance Agreement: Allows a lead reinsurer to approve exceptions to treaty exclusions on behalf of all participating reinsurers.
Cut-Through Endorsement: Grants the insured a direct right of action against the reinsurer for the reinsured amount if the primary insurer becomes insolvent.
Guarantee Endorsement: Similar to cut-through, but allows the insured to recover the entire covered loss from the reinsurer, regardless of the amount reinsured.
Indemnity Agreement: Used when multiple reinsurers participate in a treaty to ensure each pays its proportionate share to the reinsurer that issued a guarantee or cut-through endorsement.