If It Looks Like a Claim, and Sounds Like a Claim, Is It a Claim for Reinsurance
Purposes?
January 2002
In this article, Larry Shiffer explains why
a claim to an insurance company may not be a claim to a reinsurer, depending
on the nature of the reinsurance provided.
by Larry
P. Schiffer
LeBoeuf,
Lamb, Greene & MacRae, L.L.P.
Claims are a natural and expected outcome of any insurance relationship.
This is, of course, true in reinsurance relationships as well. But is a claim
for insurance purposes a claim for reinsurance purposes? The answer is, it depends.
Traditional Insurance Company Claims Responsibilities
Under a traditional third-party liability insurance contract, the insurance
company has the duty to defend the insured against any claims brought against
the insured that arguably fall within the scope of the insurance contract. Additionally,
the insurance company has a duty to indemnify the insured for payments the insured
must make to compensate claimants for damages sustained as a result of the insured's
actions that are covered by the insurance policy. Courts have held that the
duty to defend is broader than the duty to indemnify, so that loss adjustment
expenses incurred in defending against a claim may be the largest loss cost
where there is a question as to whether the claim is covered by the policy.
Similarly, under a traditional first-party insurance contract, the insurance
company is responsible to indemnify the insured for all damages sustained to
covered property or life or health risks that come within the scope of the coverage
of the insurance policy. The insurance company has a duty to investigate and
adjust claims in a timely and good faith manner and generally cannot disclaim
coverage without providing very specific reasons.
All insurance policies contain notice provisions by which the insured must
notify the insurance company of any claims brought against the insured. Many
policies require that the insured provide notice of any potential claim, even
if the insured has yet to receive a demand letter or summons and complaint.
Timely notice usually is required, and there are numerous cases discussing the
consequences of the failure of an insured to notify its insurer of a claim in
a timely manner.
Generally, when an insurance company receives notice of a claim or potential
claim, it sets up a claim file and will post an initial reserve for that claim.
Depending on the insurance contract, the insurer likely will engage counsel
to defend the insured in a liability case (or accept the insured's selection
of counsel) and may engage separate coverage counsel if there is a question
about whether the policy covers the claim. The claims examiner will investigate
the claim, often with the assistance of professional adjusters, and will negotiate
any settlements. The insurance company's claim reserve may change over time
as more information is obtained and as the claim adjuster's evaluation of the
claim changes.
Reinsurance Claims Responsibilities
Generally, reinsurers have no duty to defend, do not appoint defense counsel
for the insured, and are merely required to reimburse their reinsureds for payments
made by their reinsureds on the business that is reinsured. The trigger for
payment by a reinsurer is often actual payment by the reinsured of a claim either
in settlement or as a judgment. Reinsurance contracts are contracts of indemnity,
and generally, unless the insurance company has paid or is required to pay,
the reinsurer has no obligation to pay the claim.
Most reinsurance contracts grant the right, but not the duty, of the reinsurer
to associate in the defense of a claim by retaining its own counsel to participate
in the case. This is a right that is rarely exercised, as reinsurers prefer
to preserve the lack of contractual privity (direct contractual relationship)
between reinsurers and the underlying insureds to avoid direct actions by insureds
against reinsurers.
Reinsurers also have claim departments, but they are not generally involved
in the day-to-day adjustment of claims, and are much smaller than the claims
departments of insurance companies. The reporting of claims to a reinsurer and
whether that report is considered a claim by the reinsurer will depend on the
terms of the reporting clause of the reinsurance contract.
On proportional or quota share reinsurance treaties, generally claims are
reported in bulk on a periodic accounting basis. In these circumstances, the
reinsurer will not know about individual claims unless the reinsurer exercises
its right to audit the reinsured and examine the claims files itself. As these
claims are reported on an accounting basis, they generally are handled by accounting
staff and not by claims examiners at the reinsurer.
On excess-of-loss reinsurance treaties, claims generally are reported on
a periodic accounting report or bordereaux, which provides claim level detail
about individual claims over a certain attachment point. For example, if the
treaty is $500,000 excess of $250,000, claims that breach the $250,000 attachment
point will be reported to the reinsurer for payment. Depending on the reporting
requirements of the treaty, smaller claims may never be reported to the reinsurer
because they will never become the reinsurer's responsibility.
On facultative reinsurance, where the reinsurance is of a specific policy
and risk, all claims affecting the reinsured policy will be reported individually
to the reinsurer, depending on the attachment point of the facultative certificate
and the certificate's reporting requirements.
Generally, the reporting clause in the reinsurance contract requires the
reinsured to report all claims to the reinsurer that the reinsured believes
will affect the reinsurance contract. This generally means that if the reinsured
reserves a claim for an amount that exceeds the attachment point of the reinsurance,
that claim should be reported.
Some reinsurance contracts have more specific reporting triggers based on
reserves exceeding a specific amount (e.g., the reinsured shall report all claims
to the reinsurer where the posted reserve exceeds 50 percent of the limit of
liability covered by this contract) or by the nature of the claim or injury.
Each reinsurance contract is different and the reporting and claims payment
clauses must be examined carefully to understand when claims must be reported
to reinsurers.
Reinsurance claims examiners handle a much larger number of claims than claims
examiners in insurance companies because they are not involved in the day-to-day
adjustment of the claims or supervision of defense counsel. The reinsurer's
claims department will often contact the reinsured to obtain periodic updates
on the claim, provide input on technical claims issues, and monitor the reinsured's
claim activities for compliance with the reinsurance contract.
When Is a Claim a Claim for Reinsurance Purposes?
Unless a claim is likely to affect the reinsurance, a reinsurer's claims
department may not consider the mere report of a claim or incident as a "claim"
for its purposes. While the reinsured and reinsurer are often aligned for claims
purposes, the reinsurer is only concerned with claims that are likely to affect
its reinsurance and that are within the scope of the reinsurance contract.
If a reinsurer is providing excess-of-loss protection for claims in excess
of $250,000, a claim of $10,000 will not hit its radar screen. Particularly
in high frequency lines of insurance, like workers compensation or private passenger
auto, reinsurers do not want reports and paperwork on claims that are never
going to reach their layers. These claims are not claims for purposes of reinsurance
unless the reinsurance contract provides aggregate coverage for these claims.
Moreover, what may be a claim to the insurance company may not be a claim
to the reinsurer if the coverage provided by the reinsurance policy is not concurrent
with the underlying coverage. For example, if the reinsurance provided is limited
to boiler and machinery coverage of an all-risks policy, claims outside the
specific boiler and machinery coverage will not be considered a claim by the
reinsurer. It is important for the insurance company's claims examiners to understand
the available reinsurance protection and to cede the losses to the proper reinsurers
in a timely manner.
Timeliness of reporting claims to reinsurers is also important. Some notice
clauses require reporting within a certain time frame as a condition precedent
to coverage. Generally, the courts have found that late notice to a reinsurer
will not excuse payment of the claim by the reinsurer without showing specific
prejudice, but not all courts agree, and it often depends on the notice clause
of the reinsurance contract.
Cash Calls
Many reinsurance contracts provide for an exception to the normal reporting
and payment of reinsured losses when extraordinary events occur. When a loss
occurs of a certain magnitude, the reinsurance contract may permit the insurance
company to make a special request to the reinsurer for immediate payment of
the claim, called a cash call, to reimburse the insurance company for its payment
to its insured.
A recent example of a cash call is the request by the property insurers of
the World Trade Center to reinsurers to cover significant immediate payments
made to the leaseholder and the Port Authority to pay for the immediate needs
following the collapse of the Twin Towers. While reinsurers may dispute aspects
of the claim, often cash calls are paid under a reservation of rights in catastrophic
events so that the immediate needs of the insureds and insurers are satisfied
without further disruption or loss.
Conclusion
The claims-handling responsibilities of insurance companies and reinsurers
are different. Reinsurers are only concerned about claims that are likely to
affect their reinsurance coverage and that fall within the scope of that coverage.
The reinsurance contract provides for when an insurance company should report
a claim to the reinsurer. A claim to an insurance company may not be a claim
to a reinsurer, depending on the nature of the reinsurance provided.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.