In this article, Larry Schiffer explains why a claim to an insurance company may not be a claim to a reinsurer, depending on the nature of the reinsurance provided.
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.
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.
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.
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