Common Reinsurance Treaty Clauses, Part I

The Preamble identifies the primary insurer as the "Company" or "Reinsured."
The Affiliated Companies Clause includes the primary insurer’s affiliates under the treaty. If a newly affiliated company is added, the reinsurer may require notification. If they refuse coverage, the primary insurer typically has $45$ days to secure alternative reinsurance.
The Definitions Clause clarifies terms used throughout the treaty to ensure consistent interpretation.

Often called the Business Reinsured or Business Covered Clause, this establishes the obligatory nature of treaty cessions.
Risks Attaching Basis: The reinsurer is liable for losses on policies issued or renewed on or after the treaty’s effective date. This may leave gaps for prior losses unless a run-off provision or a modification for in-force policies is included.
Losses Occurring Basis: The reinsurer is responsible for all losses occurring during the treaty period, regardless of when the underlying policy was issued. This is often used during a cut-off from a previous treaty.
Policies Issued Basis: Covers only newly issued policies, often used if underwriting guidelines have significantly changed.
In-Force Policies Basis: Used primarily to run off existing policies when no new business is being sold.

The Access to Records Clause grants reinsurers the right to inspect accounting, underwriting, and claims records at "all reasonable times," typically meaning normal business hours. This right persists even after treaty termination.
The Currency Clause establishes the base currency and conversion rates for policies issued in original currencies.
The Governing Law Clause specifies which jurisdiction's laws will apply in the event of a dispute.
The Errors and Omissions (E&O) Clause prevents clerical or inadvertent mistakes from voiding the treaty, provided they are corrected upon discovery.
The Offset Clause allows parties to balance mutual debts, either within a single treaty (narrow) or across multiple treaties (broad).

Nuclear Incident: Excludes exposures related to nuclear reinsurance pools, except for specific incidental losses.
Pollution and Seepage: Limits coverage for environmental damage, often requiring the primary insurer to use standard ISO pollution exclusion clauses in underlying policies.
War Risk: Excludes losses from warlike activities, though it typically does not apply to U.S.-based exposures with standard exclusions or losses from strikes and civil commotion.
Terrorism: Excludes acts of terrorism. Federal coverage for certain lines is provided via the Terrorism Risk Insurance Act (TRIA).
Insolvency Fund: Reinsurers are not responsible for assessments primary insurers must pay to state guaranty funds due to the insolvency of other insurers.

Disputes that cannot be settled amicably must be submitted to arbitration as a condition precedent to any legal action.
The panel consists of three disinterested active or retired insurance or reinsurance executives.
Arbitrators are not bound by strict judicial formality or rules of evidence; they base decisions on industry custom and the original intent of the agreement.
Decisions made by any two arbitrators are binding. While the panel cannot enforce its decision, a court with jurisdiction can enter the judgment for civil enforcement.

Service of Suit: Allows primary insurers to sue unauthorized or alien reinsurers in U.S. courts. It requires these reinsurers to designate an agent for service of process and abide by final court decisions.
Insolvency Clause: Requires the reinsurer to pay obligations "without diminution," meaning they must pay the full value of claims to the liquidator even if the primary insurer is insolvent and cannot pay its policyholders.
Intermediary Clause: Mandates that the reinsurer assume the credit risk for funds transferred via a reinsurance intermediary. Payments from the primary insurer to the intermediary are considered payments to the reinsurer.
Unauthorized Reinsurance and Funding Clauses: To receive financial statement credit for cessions to unlicensed reinsurers, primary insurers must withhold premiums or secure collateral, such as a letter of credit. Collateral requirements may be adjusted for certified reinsurers based on their NAIC ratings.

The Federal Excise Tax (FET) Clause makes the primary insurer responsible for remitting a $1\%$ tax on gross premiums ceded to alien reinsurers.
Exemptions from FET exist for reinsurers in countries with specific U.S. trade agreements, such as Germany, Great Britain, and Bermuda.

Used when multiple reinsurers participate in a single treaty to control individual participation.
It establishes several liability, meaning each reinsurer is responsible only for its specified percentage.
The failure of one reinsurer to meet its obligations does not increase the liabilities of the remaining participants.