Impact of contract compliance on resolution of reinsurance disputes

Facultative reinsurance is the oldest form of reinsurance and refers to the temporary entry by the original insurer into a reinsurance contract with another insurer regarding a specific item of insurance business (e.g. a very large risk or an item of insurance business that exceeds a certain limit). Reinsurance usually involves an insured subject matter and settlement risk of a large amount, and constitutes one of the important steps taken by insurance companies to control risks.

However, in actual reinsurance practice in China at present, the importance of compliance requirements in the course of the contract process is commonly overlooked. After being brought together through the offices of an insurance broker, the cedant and reinsurer are deemed to have concluded an agreement after simple communication by e-mail, fax, etc. Not only do they not execute a written contract, but they do not reconfirm changes in key conditions.

Such non-compliant operations conceal huge commercial risks as, if a large insurance settlement is triggered by the occurrence of an insured event, the reinsurer may strictly cite contract law rules and deny the existence of a reinsurance relationship, thus evading its liability to pay indemnities. Based on our lawyers’ experience in handling a number of reinsurance commercial disputes recently, we have seen that the key point of disagreement in reinsurance contract disputes comes down to whether a reinsurance contract is formed. The above-mentioned carelessness and points of non-compliance can result in the court denying that a contract has been formed, thereby greatly increasing the cedant’s risk of losing.

Harry Wu is an associate at Wintell & Co. in Shanghai