Expert Commentary

Reinsurance First Advised Clause

The diversity of notice and reporting-type clauses in reinsurance contracts is astounding. Different contract drafters have come up with all sorts of clauses to fit the specific circumstances of particular reinsurance programs. Many of these clauses were developed years ago, and the purpose and intent of the clauses may have been forgotten with the passage of time. And, just when you think you have seen every clause imaginable, an old reinsurance contract turns up with possibly a new twist on contract wording.


Reinsurance
September 2015

In a recent reinsurance dispute over latent asbestos personal injury losses, an arbitration panel, followed by the court, was asked to address a common cause coverage provision in a series of reinsurance contracts that contained contract wording described by the parties and the court as a "First Advised Clause." Arrowood Indem. Co. v. Equitas Ins., Ltd., No. 13–cv–7680, 2015 U.S. Dist. LEXIS 63643 (S.D.N.Y. May 14, 2015); see also Arrowood Indem. Co. v. Equitas Ins., Ltd., at 2015 U.S. Dist. LEXIS 99787 (S.D.N.Y. Jul. 30, 2015). This article discusses the nature of the First Advised Clause.

First Advised Clause History

The First Advised Clause appears to have been a clause used in the 1960s in certain global slip excess-of-loss reinsurance treaties written by underwriters participating in the Lloyd’s of London marketplace. The clause provided as follows:

[t]his Contract does not cover any claim or claims arising from a common cause, which are not first advised during the period of this Contract.

It is part of a larger common cause coverage meant to allow the cedent to cumulate losses ("occurrences") and cede them to the excess-of-loss treaty when the individual losses all arise out of a larger common cause (occurrences during the term of the contract that are the "probable common cause or causes" of more than one claim). This clause was apparently one of three categories of claims that could be ceded under the reinsurance contract.

Meaning and Purpose

Interpreting the meaning and purpose of the First Advised Clause was the issue confronted by the arbitration panel in the arbitration underlying the lawsuit referenced above. The arbitration panel found that the clause was ambiguous and was faced with two competing interpretations of the clause. The cedent argued that the clause was intended only to prevent recovery of known losses whose common cause occurred before the term of the original reinsurance contract. The reinsurers argued that the clause required that any common clause claims be noticed during the original reinsurance contract period for the claims to be covered under the reinsurance contract.

Faced with these competing interpretations, the arbitration panel ultimately agreed with the cedent’s position as the more reasonable interpretation of the clause and awarded substantial damages to the cedent and against the reinsurer. Now, there’s much more to the litigation that followed concerning whether certain documents should have been produced, which might have altered the outcome of the arbitration panel’s decision, but those issues are beyond the scope of this article.

Analyzing the Meaning and Purpose

The controversy in the arbitration was about whether the First Advised Clause was a notice provision or a known losses provision. The clause starts off by specifically stating that the reinsurance contract does not cover any claim that otherwise arises from a common cause. This opening clause is followed by these words: "which are not first advised during the period of this Contract." The clause is an exclusionary clause, which precludes coverage under the reinsurance contract for claims that would otherwise qualify as arising from a common clause. The basis of exclusion is the failure of the cedent to advise the reinsurer of the claim "during the period of the contract."

So, is it a notice clause or a known loss clause? Or is it something else?

Notice Clause

Notice and reporting clauses are discussed in our January 2008 Commentary. This type of clause sets out the requirement by which the cedent must notify the reinsurer of a claim or potential claim that may or will be subject to a subsequent reinsurance billing.

Reinsurance notice clauses are not that different in concept from notice clauses in direct insurance. Just like an insurance company needs to know about a claim at the earliest possible stage, a reinsurer also needs to know about a possible claim. The difference is that an insurance company with a duty to defend really needs to know about a claim right away so it can begin to investigate the claim and start the process of defending its insured. A reinsurer has no defense obligation, so its need to know about a claim at the earliest stage is less critical.

Nevertheless, a reinsurer will often have a contractual right to associate in the defense of a claim and accordingly require timely notice in order to exercise that right. The right to associate, however, is less of an issue where multiple claims are aggregated under a clause like the Common Cause Clause that contains the First Advised Clause being discussed here.

Known Loss Clause

A known loss clause, which appears in direct insurance and in reinsurance contracts, addresses a completely different issue. The known loss clause typically precludes coverage for losses incurred and notified to the insured or to the cedent prior to the inception date of the relevant contract. The purpose of this clause is to make sure that only losses incurred after the date of the contract are covered. The clause limits coverage to new losses after the effective date of the contract and precludes coverage for losses incurred earlier.

While different, a known loss clause in a reinsurance contract is similar to a warranty of no known losses, assuming companies typically do not price and do not wish to cover losses that have already been incurred and noticed to the cedent. Where the reinsurance contract is on a risks-attaching basis, the reinsurer typically seeks a warranty that there are no known losses or will draft a clause precluding coverage for losses known to the cedent prior to the effective date of the reinsurance contract.

So, What Is the First Advised Clause?

While the arbitration panel found that the First Advised Clause was more akin to a known losses clause and accepted the cedent’s interpretation as most reasonable, it is hard to overlook the plain language of the First Advised Clause. The last part of the First Advised Clause precludes coverage for claims that "are not first advised during the period of this Contract." What else does the quoted language mean if not that the cedent had to first advise the reinsurer of the claims during the period of the reinsurance treaty?

Another way to look at the First Advised Clause is akin to a type of claims-made coverage clause. Under a traditional claims-made direct insurance policy, a covered claim must have been incurred during the policy period (or after the retroactive date) and noticed to the insurer during the policy period (or extended reporting period). While there have been some unusual interpretations of claims-made coverage by some courts, most courts enforce claims-made provisions and preclude coverage if the claim was incurred outside the policy period or where the insurance company was not given notice of the claim during the policy period.

Here, the First Advised Clause implies that common cause claims must be reported (first advised) to the reinsurer during the reinsurance contract period. If the claims are not reported within the reinsurance contract period, the claims are not covered under the reinsurance contract.

Conclusion

There is very little written about the First Advised Clause, and it appears to be a clause that existed for a short period of time on specific reinsurance contracts written by underwriters at Lloyd’s of London. The court decisions mentioning the First Advised Clause say very little about the clause itself. Commentaries about the cases are also not on point and focus instead on the legal issues of seeking to avoid the effect of an arbitration award after the time to vacate the award has expired.

While the arbitration panel accepted the cedent’s interpretation of the clause as a known loss clause, the First Advised Clause could easily have been read as a notice clause or a hybrid claims-made-type clause requiring notice of the claims within the reinsurance contract period.


 

Acknowledgment

The author would like to thank and acknowledge the research contributions to this Commentary by Lily C. Geyer, a 2015 summer law clerk in the Washington, DC, office of Squire Patton Boggs (US) LLP. Lily, also an Army reservist, attends American University Washington College of Law and will graduate in 2016.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do 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.

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