A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

Chapter 7

CLAIMS
THE LIABILITY OF THE REINSURER
Probably one of the widest reinsurance policy wordings is that of Toomey v. Eagle Star Insurance Company Limited [1993] 1 Lloyds
Rep. 429 where the reinsurer agreed to pay all claims returns, reinsurance premiums and other outgoings payable by the
reinsured in respect of the 1965 Underwriting Account which does not require the syndicate to prove to Eagle Star that they were
legally liable to pay the claims under the terms of their insurance policy. However, in practice, reinsurance contracts are much
narrower than this.

When does the reinsured become liable to pay the insured?

Obviously the reinsured is keen to recover monies as soon as possible from the reinsurer since this will help with the reinsureds
solvency and cash flow. Naturally, reinsurers will wish to delay making any payments for as long as possible since they will be
earning investment income on that money.
Some reinsurance contracts provide for simultaneous payment so that the reinsurer pays the reinsured at the same time as the
reinsured pays its insured but these are not very common.

Versicherungs und Transport A/G Daugava v. Henderson [1934] 49 Ll. L. Rep. 252
In this case, involving a proportional contract, the court held that provided the reinsured can prove to his reinsurers that he is liable for a specific
amount to his insured and the loss is covered under the policy the reinsurer is obliged to reimburse the reinsured even though the reinsured has not
actually paid the loss. The case involved fire insurance and reinsurance in Latvia. On 11 April 1930 a fire occurred at the factory which was seriously
damaged. The Dougava company paid their original insured and made a claim against their reinsurers and the point to be decided was, when was the
loss payable? The insurance and reinsurance policies were in the Latvian currency (Lats). At the date of the fire there were 25.22 Lats to the pound.
Dougava paid their original insured in January 1932, which was after Britain had gone off the gold standard and there were 17.19 Lats to the pound.
The Court of Appeal held that the date of settlement and payment by the insurer in January 1932 is the correct date at which the rate of exchange is to
be applied. The Court of Appeal were keen to ensure that the reinsured was not over-compensated with Scrutton L.J. commenting: If the rate of
exchange is fixed at a date before the insurers liability to pay is quantified and satisfied, the insurer may, as in the present case, recover more than an
indemnity, which is contrary to all principles of insurance indemnity (at p. 253).

The leading case on the subject is:

Charter Re v. Fagan [1997] A.C. 313

The plaintiff reinsured in this case was insolvent and was reinsured with Lloyds Syndicates 540 and 542. Under two excess of loss treaties the
reinsurers undertook to indemnify the insurers against all losses howsoever and wheresoever arising during the period of reinsurance on any interest
under policies and contracts of insurance or reinsurance underwritten by the reinsured in their whole account. The third policy was an aviation risks
policy. All policies provided that the reinsurer was to be liable for the losses of the insurers in excess of an ultimate net loss of a specified amount. The
term net loss was defined as the sum actually paid by the reinsured in settlement of losses or liability after making deductions for all recoveries, all

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salvages and all claims upon other reinsurances whether collected or not and shall include all adjustment expenses arising from the settlement of
claims. The insurers were in provisional liquidation and sought determination of the issue of whether or not it was necessary for the insurers to have
made payments in respect of the claims before the reinsurers became liable. The focus of the case was on the meaning of actually paid. At first
instance Mance J. held that actually paid was not enough to impose a condition precedent of payment. The Court of Appeal upheld the view of
Mance J. with the exception of Staughton L.J., who insisted that the words should be given their literal meaning. He said: The literal meaning of the
words in the contract requires that the insurers shall have paid before the reinsurers are liable (at p. 368). The House of Lords endorsed Mances
decision and gave the words a technical meaning, which was considered appropriate for this specialised form of reinsurance.

INTERPRETATIONEVENTS, CAUSES AND OCCURRENCES

Robert Merkin

A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

Often the reinsurance contract contains the words event, loss or occurrence which can be very vague and which can cause
difficulties when claims arise. It is not surprising that there has been a great deal of litigation in this area as reinsureds try to maximise
their recoveries and reinsurers attempt to minimise the payments they have to make.

Event
As mentioned earlier in Municipal Mutual v. Sea Insurance Company Limited [1996] L.R.L.R. 265, acts of vandalism over an
18-month time period were regarded as one event, with the event being the lack of supervision.

Caudle v. Sharp [1995] L.R.L.R. 433

This case illustrates the difficulty of interpreting the word event. The reinsured was the Sharp Syndicate at Lloyds, which was the Employee and
Officers insurers of Outhwaite. Outhwaite, who was a Lloyds underwriter, wrote 32 run-off reinsurance contracts which were subject to huge losses
because of environmental pollution and asbestos claims. As a result the Lloyds Names on the Outhwaite syndicate suffered enormous losses and sued
Outhwaite for negligence. Settlement with the Names was agreed at 116 million. The Sharp syndicate as insurers of Outhwaite paid a large
proportion of the settlement and sought a recovery from their reinsurers, Caudle. Sharp argued that its contribution in respect of the Outhwaite action
amounted to one loss and since the excess had been breached the reinsurers should reimburse them. The reinsurers argued that each of the 32 run-off
reinsurance contracts constituted a separate loss, which meant that the excess had not been breached and reinsurers were not required to make any
payments. They also contended that the members agents claims did not fall within the cover period of the reinsurance contract.
The excess of loss reinsurance contract contained an arbitration clause. The arbitrators held that the payments made by Sharp to the Outhwaite
syndicate related to a series of losses arising out of one event. The event being Outhwaites failure to appreciate or investigate the asbestos problem.
The court of first instance agreed with the arbitrators decision.
The Court of Appeal reversed the first instance decision and decided that there were 32 events. Evans L.J. said that There were 32 separate occasions
when Mr Outhwaites failure manifested itself and his ignorance gave rise to an occurrence of negligence, whether an act or omission, which itself
gave rise to a claim and a loss under the original policy ((1995) L.R.L.R. 433 at p. 439).

Axa Re v. Field [1996] 1 Lloyds Rep. 26

In this case the defendant Lloyds syndicate was liable to pay claims for the negligence of the underwriters following the Cox v. Bankside decision.
The syndicate then sought reimbursement from its reinsurers. The reinsurance policy was an excess of loss contract with one event language. The
original insurance policy contained the wording series of events or occurrences attributable to one originating cause and the reinsured argued that
this was the same as series of occurrences arising out of one occurrence in the reinsurance contract and that therefore the reinsurers should accept
that the losses arose out of just three events.
At first instance Phillips J. thought event and cause were the same thing. The Court of Appeal held that the reinsurers were bound as to the result
in the Cox v. Bankside decision and that in this case it was sensible to conclude that there were three causes.
The House of Lords came to a completely different decision. It decided that originating cause and event meant totally completely different things.
Lord Mustill commented that an event is something which happens at a particular time, at a particular place, in a particular way. A cause is to my
mind something altogether less constricted. It can be a continuing state of affairs, it can be in the absence of something happening (at p. 239). He also

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made it clear that if the reinsured planned his reinsurance cover to be the same as his cover for his insured then he would have used the same words in
each contract. Therefore, it will be prudent for reinsureds to check that the wording of their reinsurance contracts is compatible with the wording used
in their own policies.

Cause
In Cox v. Bankside [1995] 2 Lloyds Rep. 437 there were hundreds of LMX contracts, which were negligently underwritten by three
underwriters. The court held that this amounted to three originating causes.

Occurrence

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A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

Kuwait Airways Corporation v. Kuwait Insurance Company Limited [1996] 1 Lloyds Rep. 664
In Kuwait Airways Corporation v. Kuwait Insurance Company Limited [1996] 1 Lloyds Rep. 664 (which involved the seizure of aircraft from Kuwait
by Iraqi forces), the Kuwait Airways Authority had cover in respect of war risks which carried a $300 million limit in respect of any one occurrence,
any one location for ground risks. According to Rix J. there was only one occurrence, and that was the invasion of Kuwait and the capture of the
aircraft. He said that the question of whether or not there was one occurrence must be scrutinised from the point of view of an informed observer
placed in the position of the insured, and there must be a degree of unity in relation to cause, locality and the intentions of the human agents concerned.
In this case the human agent was Saddam Hussein and his intention was to remove all assets from Kuwait. He also decided that the entire airport
constituted one location in the context of war risks insurance. The House of Lords gave seizure its normal meaning in an insurance and reinsurance
policy so that it included forcible seizure as in this case. In relation to the spares extension the House of Lords found that the words usedit is noted
and agreed that the indemnity provided by this policy other than paragraph (a) of section one is extended to include loss of or damage to aircraft spares
made it clear that it was an extension clause. Since the war perils were not excluded under the clause this meant that under the usual principles
Kuwait Airways could recover. Lord Hobhouse emphasised that the courts will not correct badly worded clauses and said if, as here the parties have
used plain language to express their intention then that should be an end to it; the courts should enforce the contract in accordance with its terms.

REINSURANCE CONTRACTSGOVERNING LAW ANDJURISDICTION

Which law governs the reinsurance contract?
It is very important from the claims perspective which law governs the reinsurance contract since this will assist the claims handler in
determining whether he should run the risk of letting the dispute between the reinsurer and insurer being litigated.
Normally the governing law is specified in the reinsurance contract. If it is not specified then you have a situation where
reinsurance is placed in different countries and a different law may govern the relationship between the reinsurer and the reinsured in
each jurisdiction. Where reinsureds do not believe that their own law will apply to the contract it is very common for them to forum
shop by commencing proceedings in their home court for a negative declaration, which gives them the benefit of their own law
applying to the contract and the benefit of litigating in their home court where they know the judges and can use their home lawyers.
Governing law is determined by Article 3 of the Rome Convention which was given effect in the United Kingdom by the Contracts
(Applicable Law) Act 1990, which says that contracts are governed by the law chosen by the parties either expressly or as
demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case.
If there is no specific choice of law in the contract then Article 4 states that the law of the contract shall be the law of the country
with which it is most closely connected, which is presumed to be the country where the party who is to effect the performance
which is characteristic of the contract resides.
The issues of governing law were discussed in the following two cases:

Gan Insurance Company Limited v. Tai Ping Insurance Company Limited [1999] Lloyds Rep. IR 229; Royal
Insurance Company v. Central Insurance Company [1999] Lloyds Rep. IR 229
The plaintiffs in both of these cases were facultative reinsurers of Taiwanese insurers who had written all-risks cover for a factory in Taiwan. A fire
occurred at the factory causing extensive damage. Tai Ping Insurance coordinated the actual handling of the claim. The direct insurers rescinded the
contracts arguing that the policy terms in respect of fire protection had been breached, and in addition Article 68 of the Taiwanese Insurance Law had
been breached with regard to disclosure requirements.
The reinsurers refused to pay the claims and commenced proceedings in England seeking declarations that they were not liable to the reinsureds
because the reinsureds had breached the claims cooperation clauses which were conditions precedent to liability and they could avoid the contracts

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because of misrepresentation. The contracts did not state which governing law should apply.
The reinsureds argued that Taiwanese law governed the contract because the risks were Taiwanese, they were in respect of a Taiwanese factory owned
by a Taiwanese company and insured by Taiwanese insurers under a policy governed by Taiwanese law. They argued that the reinsurance contract was
governed by Taiwanese law because it contained as original wording and the insurance policy was governed by Taiwanese law.
The reinsurers argued that the contracts were governed by English law because the facultative slips contained several standard London market clauses,
including claims cooperation wording. They argued that the as original wording only related to the nature of the risk, the period of cover and the
geographical limits. They said that the use of London market clauses indicated an implied choice of English law as the governing law. Furthermore,
the contracts were more closely connected with England since the reinsurance was placed in London using London market forms and with reinsurers

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A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

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operating in the London market.

Cresswell M.J. held that there was an implied choice of English law and that English law would apply because the contracts were more closely
connected with England and he completely agreed with the arguments of the reinsurers. The Court of Appeal supported this view.

It appears from these cases that if a reinsurance contract is made by English reinsurers operating in the London market that the
English courts will decide that English law is the governing law. The only way to rebut this presumption is for the reinsured to check
the reinsurance contract very closely before agreeing to it and ensure that the governing law he wishes to apply is expressly stated in
the contract.
Underwriters are often sloppy when writing a risk about the issues of governing law and dispute resolution, assuming that
problems will not arise. Nevertheless, it is important that the governing law and seat of arbitration are stated in the reinsurance
contract since, if issues do arise at a later stage over a claim or a series of claims, then both parties know exactly the procedure and
law which will apply.

Which jurisdiction governs the reinsurance contract?

Normally the parties to a reinsurance contract would have agreed in advance which jurisdiction should hear a dispute between them
and this will usually be stipulated in the jurisdiction clause of the reinsurance contract. A typical jurisdiction clause would read like
this:
Jurisdiction Clause
This agreement shall in all respects be governed by and construed in accordance with English law and the parties hereby irrevocably agree to submit to
the exclusive jurisdiction of the English courts.

There have been a number of recent cases involving the appropriate jurisdiction for hearing disputes between parties to a
reinsurance contract. In these cases the courts appear to have adopted a pragmatic and commercial approach to the issue.
In King v. Brandywine Reinsurance Co. (UK) Ltd [2004] 2 All E.R. (Comm) 443 arising out of the 1989 Exxon Valdez oil spill in
Alaska, King relied on a service of suit clause in the policy which provided that the insured had an option to select the jurisdiction of
New York, arguing that New York was the proper law of the contract. The court dismissed this argumentthe risks covered by the
policy were worldwide, as was a significant portion of the following market, and London market wordings were incorporated or
referred to in the policy. These factors all pointed to English law being the proper law of the policy.
In Travelers Casualty and Surety v. Sun Life Assurance Company of Canada (UK) Ltd [2004] EWHC 1704 (Comm) the court
decided that it would be cheaper and easier for the trial to take place in England. In Markel International Insurance Company Ltd v.
La Republica Compania Argentina de Seguros Generales SA [2004] EWHC 1826 the court decided that although the underlying risk
and the defendant insurers were based in Argentina, the fact that most of the witnesses were English-speaking, that most
correspondence was in English and that the reinsurance contracts were governed by English law was sufficient for the court to decide
that the appropriate forum for the dispute was England.
In Tonicstar Ltd (t/a Lloyds Syndicate 1861) v. American Home Assurance Co. [2004] EWHC 1234 (Comm) it was held that the
natural forum for disputes concerning insurance contracts made in London, placed through Lloyds Brokers and incorporating
standard Lloyds terms was England.

THE LIMITATION ISSUE

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In the UK the limitation period relating to reinsurance contracts is stated in section 5 of the Limitation Act 1980 as an action
founded on simple contract shall not be brought after the expiration of 6 years from the date on which the cause of action accrued.
For the purposes of reinsurance the time period starts to run from the date that the reinsureds liability is established by agreement,
judgment or award.
The leading case on this subject is Dougava v. Henderson (1934) 49 Ll. L. Rep. 252 (discussed earlier), where the Court of Appeal
held in relation to a fire policy that the cause of action of the reinsured did not start running until the reinsureds liability was an
ascertained sum. Scrutton L.J. put it succinctly as I do not understand how the reinsurer can be liable to pay an amount until it has
been fixed between insurer and insured (at p. 253). In Halvanon Insurance Company v. Companhia de Seguros do Estado de Sao
Paolo (1995) L.R.L.R. 303 the plaintiff reinsured argued that a cause of action did not arise until an account was rendered to the
reinsurer under the reinsurance contract. This was rejected by the Court of Appeal.
Therefore usually the reinsured has six years from the date upon which the claim has been quantified in which to make a recovery
from his reinsurers. This is reasonable since sometimes it takes a long time for the quantum of the claim to be established and if the
time for limitation purposes began when the loss occurred then time would start running against the reinsured before he knew the
amount of his liability and the extent of the recovery he needs to make from reinsurers.
There are, however, certain situations in which the time period may be altered. The most common of these is by agreement
between the parties in the reinsurance contract. For example, the parties could state in their reinsurance contract that for limitation
purposes time will not begin to run until the reinsured presents an account to the reinsurers for payment. Using an example from the

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A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

insurance context, in Walker v. Pennine Insurance Company [1980] 2 Lloyds Rep. 156 the court held that a clause stating that the
insured had just one year in which to enforce the policy against the insurer was reasonable.
The limitation period will stop running if proceedings are commenced, or an arbitrator is appointed in respect of the matter
between the reinsured and reinsurer.
If the reinsurer admits liability under the contract in a very clear way then he will not be able to rely upon the limitation point to
dispute the quantum of the claim.
Similarly, a signed written acknowledgement or part payment of the claim will start the limitation period running from the
beginning again.
Sometimes the reinsured and reinsurer may be involved in long, protracted negotiations regarding the claim and the limitation
period may be rapidly approaching. In this situation the parties may enter into a standstill agreement which will serve to stop the
limitation period on that date while the negotiations continue.
The problem of limitation can be especially acute in the case of reinsurance underwriting pools, which was highlighted in the
following case:

Companhia de Seguros Imperio v. Heath (REBX) Ltd [1999] Lloyds Rep. IR 571 (Q.B. Com. Ct.); [2001] Lloyds
Rep. IR 109 (C.A.)
Imperio participated in a pool, which was run by Heath between 1977 and 1979. In 1995 Imperio issued a writ against Heath claiming for breach of
contract, negligence and breach of fiduciary duty. Imperio argued that the pool had been unlawfully operated by Heath because Heath had chosen
Imperio to front for the pool, thereby exposing it to 100% of the risk when it was unnecessary to do so. A number of pool members had become
insolvent and Imperio insisted that it would only pay its net line. Since the causes of action in contract and tort accrued when Imperio were committed
to front a particular risk the claims were statute-barred. Although deliberate concealment by Heath served to suspend the commencement of the
limitation period as a result of four years of investigation, there was no good reason for Heath to use Imperio as a front in 1988 and the claim was
statute-barred because all of the facts were known to Imperio from the outset. In respect of the fiduciary duty, the limitation period would not apply if,
in addition to acting as an agent for Imperio, Heath acted as a trustee of the pools money under a trust. The Commercial Court held that the six-year
limitation period applied to the fiduciary claim on this occasion and thus it was time-barred.

Some people believe that an honourable engagement clause, which permits arbitrators to opt out of the strict rules of law, allows
them to disapply the limitation period. However, this appears to be incorrect. For example, in Orion Compagnia Espanola de Seguros
v. Belfort Maatschppij Voor Versekgringeen [1962] 2 Lloyds Rep. 257 a Belgian Insurance company applied to set aside an award
made by an umpire in favour of the Spanish Insurance Company (Orion). The arbitration arose from a dispute about a quota share
non-marine reinsurance treaty. Megaw J. argued that arbitrators are bound by the usual rules on limitation.

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The new limitation regime

The Law Commission has recommended that the different limitation periods, which currently apply to different causes of action, be
abolished and replaced by a new core regime. Under this core regime, any claimant who wishes to commence an action must do so
within three years of the date upon which they knew or ought reasonably to have known that they had a significant cause of action
and knew the identity of the defendant. In the reinsurance field reinsureds are presumed to know when the action against their
reinsurers accrues and the date when they have a claim against their reinsurers will be the same. This effectively means that for
reinsureds the period in which they have to bring a claim against their reinsurer would be reduced from six years to three years. In
addition there will be a 10-year long stop limitation period, which would begin to run from the date of the act or omission which gave
rise to the claim. The Law Commission proposes that the new regime should have retrospective effect, so that it will apply to all
causes of action which accrue before it commences, except where the action is already time-barred or where the action has already
been commenced. For the reinsurance industry this will mean that all claims, which are currently older than three years will
immediately become time-barred unless the claimant commences proceedings or a standstill clause is agreed between the parties. The
new proposals will be particularly problematic where there are chains of reinsurance in operation because it can take a long period of
time for claims to filter their way through the market to the end of the reinsurance chain. This would mean that if the original
insureds claim was settled or determined 10 years ago and the reinsurer has not yet made a recovery under his own reinsurance cover
then he will be unable to do so.

THE RIGHTS OF THE REINSURER

Payment of premium
The case of Fenton Insurance Company v. Gothaer Versicherung [1991] 2 Lloyds Rep. 172 establishes that the fact that the
reinsured does not pay the reinsurer the premium does not mean that the contract has been abandoned, and the reinsured may
therefore still present claims to the reinsurer for reimbursement unless the contract specifically provides that the contract can be

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A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

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cancelled if the premium is not paid. Otherwise, the only option available to the reinsurer is to sue the reinsured or pay the claims less
the premium amount. It is common for reinsureds to delay paying the reinsurance premium until they have received the insurance
premium from their insured. Nevertheless, at law the reinsured is obliged to pay the reinsurance premium regardless of whether or not
he has received the insurance premium from its original insured.
There are a number of ways in which reinsurers can protect themselves from reinsureds who fail to pay the premium. These mostly
involve the inclusion of appropriately worded premium payment warranties some of which are discussed below:
Late Payment Clause
In the event that the Insured fails to pay any premium due hereunder within 6 months together with any interest due thereon in accordance with the
provisions of this agreement, then the Insurer has the option by written notice served within 90 days of expiry of the said six months to reduce the limit
to 125% of the premium actually paid.

Another option is for the reinsurer to charge interest on the unpaid premium.
Late Payment Clause
In the event that the Insured fails to pay any premium due hereunder on the day that it falls due then interest shall accrue on the amount outstanding at
the rate of % per month.

Sometimes the payment of additional interest is simply not enough since the reinsured may have no intention of paying the
reinsurance premium. If this is the case then a clause such as the two outlined below will be more appropriate which will enable the
reinsurer to terminate the reinsurance contract ab initio if the reinsured has not paid the premium within a specified time period.
Non Payment of Premium Clause
In the event that the Insured fails to pay any premium due hereunder together with interest thereon as appropriate within months/days of the
inception date of this agreement then this agreement shall be automatically terminated and the Reinsurer shall be released from all liabilities, past,
present and future, with regard to this agreement.
Premium Warranty
The Reinsured warrants that it shall pay the premium due hereunder within months/days of the inception date of this agreement. In the event that the
Reinsured fails to so pay then this agreement shall be automatically terminated ab initio and the Reinsurer shall be released from all liabilities, past,
present and future, with regard to this agreement.

The type of clause which the reinsurer considers appropriate to include in the reinsurance contract will depend upon the market
practice in the jurisdiction and the business relationship that the reinsurer has with the reinsured.
It is important to remember that reinsurers should be clear of their intentions before demanding payment of the premium since by
doing so they may prejudice their position. For example, in Compagnia Tirrena Di Assicurazioni Spa v. Grand Union Insurance
Company [1991] 2 Lloyds Rep. 143 there was a premium warranty, which stated premium and claims to be settled in account.
Premium warranty on due dates. The reinsured did not render an account or pay the premium and therefore breached the warranty.
However, the court held that by demanding payment of the premium the reinsurers had succeeded in affirming the contract.

The inspection of records

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Generally, it is common for reinsurers to inspect the records of their reinsured although this practice is more widespread in the USA
and the UK than in continental Europe. During an inspection the reinsurer will be checking to ensure that the reinsured is settling
claims properly and is not making payments which he should not be making. An inspection is a good opportunity for the inspectors
(usually experienced claims professionals) to feed back information to underwriting on claims handling procedures and loss
developments, which can prove invaluable on renewal.
Reinsurance contracts normally expressly provide that the reinsurer has the right to inspect the reinsureds records and if it is not
explicit then it will be implied into the contract. In Phoenix v. Halvanon [1985] 2 Lloyds Rep. 552 Hobhouse J. held that the
reinsurer had an implied right to inspect the reinsureds records, but this was not a problem in this case because both parties agreed
that there existed an implied right to inspect anyway.
However, sometimes the courts may not be prepared to infer a right of inspection as in Socit Anonyme Intermediaries
Luxembourgeois v. Farex Gia and others [1995] L.R.L.R. 116, where Hoffmann L.J. said that the right to inspect depends upon the
terms of the contract and since the contract in this dispute contained no inspection clause the reinsurers had no access to the
reinsureds books. It is therefore much better for reinsurers to include an inspection clause in the contract to make sure that they have
the right to inspect the reinsureds records if they need to.

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A GUIDE TO REINSURANCE LAW CHAPTER 7 CLAIMS

1st Edition, 2007

Clearly there is little value in inspecting documents if you are unable to photocopy or use the documents. This issue was discussed
in Mutter v. Eastern and Midlands Railway Company (1888) 38 Ch.D. 92 when the Court of Appeal said that a person having a right
to inspect a document had a consequential right to take a copy of it or of so much of it as he requires for some legitimate purpose.
This is very vague and may lead to abuse of the information. It is therefore very important that a confidentiality agreement is signed
by the parties prior to granting the reinsurer access to information so that the information is not abused.
In the Irish case of Winterthur Swiss Insurance v. The Insurance Corporation of Ireland plc [1989] I.L.R.M. 13 the first instance
court decided that the inspections clause in the reinsurance contract authorised the reinsurer to copy documents legitimately required
for the purposes of inspection.
The reinsurer must be careful not to prejudice its legal position by inspecting the cedants records. In Iron Trades Insurance
Company Limited v. Companhia de Seguros Imperio [1991] 1 Re L.R. 213 claims were made by Iron Trades and others against their
reinsurers for payments made in respect of two marine quota share treaties. In 1982 the reinsurers were aware that there had been
misrepresentations by the reinsured but they waited until late 1983 before exercising their right to inspect the reinsureds records.
Hobhouse J. held that because the reinsurers had not reserved their rights under the contract and had delayed before carrying out the
inspection it had affirmed the contract. Therefore, if the reinsurer has evidence of misrepresentation it should reserve its rights under
the contract immediately, but if it only has suspicions then it should carry out an inspection immediately to obtain further
information.
Often the inspection of records by the reinsurer can lead to tension between the reinsurer and the reinsured. It is therefore
imperative that the inspection is carried out in an efficient and professional manner. Some reinsurers choose to use their own in-house
inspection team, whereas others prefer to use an external consultancy. The difficulties of inspections of records were highlighted in:

Yasuda Fire and Marine Insurance Company of Europe Limited v. Orion Marine Insurance Underwriting Agency
Limited [1995] 1 Lloyds Rep. 525
This case, although it actually involved agency agreements, has equal application to reinsurance matters. The plaintiffs were involved in a number of
run-off reinsurance pools, which were managed by the defendants. The underwriting agency agreements, which were similar to reinsurance contracts,
contained detailed express clauses permitting the inspection of records. Representatives of the plaintiffs carried out a very detailed inspection of the
defendants files, which included the reviewing of 16,000 risk files. However, problems arose when the plaintiffs wanted access to the defendants
computer records because the defendants kept confidential records on the computer about other pool members to which the plaintiffs should not be
granted access. In Coleman J.s view the computer database represented part of the records, which should be made available to the plaintiff for
inspection purposes. He said: If they (the defendants) are to perform their obligations to provide inspection of all such records as are relevant, but
object to disclosure of that which is irrelevant, it is for them to find some means of either concealing the irrelevant or of extracting that which is
relevant from the mass of the material (at p. 527).

The case warns companies that they should be careful about how and where they store information which they may be required to
make available for inspection. The result could be harsh on small companies, since it may require a great deal of work to separate the
relevant from the irrelevant and the confidential from the not confidential. However, if inspection does not mean a full inspection,
then material could easily be concealed in computers by unscrupulous reinsureds to prevent their reinsurers accessing it.

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In addition to the reinsurance inspections it is becoming increasingly popular for reinsurers to perform audits of their reinsureds.
The audits fall into three categories:
The first kind of audit is the pre-contract audit. In such an audit the reinsurer will examine the underwriting standards and
claims handling procedures of its prospective reinsured to check that it is satisfied that the standards are acceptable and
that the premium quoted by the reinsurer is correct for the risk.
The second type of audit is the underwriting audit, which involves an examination of the reinsureds underwriting
philosophy.
The final type of audit is the claims audit. The reinsurers will check that adequate reserves are being held in respect of
claims, there is no step reserving and that the reinsured is taking a realistic and proactive stance in the claims handling.
The reinsurers will also look at the claims which have not been notified to the reinsurers because they have not breached
the retention figure, to see if these claims should be reported to reinsurers because there is a likelihood that the claims will
have a serious potential. It ensures that the reinsurer has a realistic view of his likely liabilities and the profitability of the
business; it is also marketed by the reinsurer as an advantage to the reinsured since it gives the reinsured feedback on their
claims handling and offers them the opportunity of a fresh review of the files by new personnel.

Robert Merkin