In these Expert Commentaries, we have tried to explore the meaning and usage of quite a few reinsurance terms of art and industry shorthand. Another one of those industry phrases is the well known, but little considered, "written as such" modifying clause. Many reinsurance contracts contain coverage grants and exclusions for certain classes of risks that use the phrase "written as such" to modify the meaning of those grants or exclusions. This Commentary explores the meaning of this phrase and examines its application in various reinsurance contracts.
Reinsurance contracts often contain coverage grants and exclusions that set forth the specific classes of business or risk exposures covered or not intended to be protected or reinsured. A property treaty generally is not intended to cover losses arising from casualty risks. A lawyers professional liability excess-of-loss treaty most certainly is not intended to assume losses arising out of automobile accidents. A broad property and casualty quota share treaty covering commercial general liability (CGL) policies may not be intended to cover risks typically covered by stand-alone specific earthquake or flood policies. Typically, broad-based reinsurance contracts will contain specific coverage grants and also a list of exclusions specifying the lines of business or specific perils that are not intended to come within the contracts.
Broader-based casualty or property reinsurance contracts will use a list of exclusions to make it clear that certain exposures or perils are not intended to come within the expansive scope of the contracts. For example, exclusion lists may be drafted to exclude certain classes of exposure such as professional liability and aviation or specific perils such as flood, earthquake, or hail. Often, these lists of exclusions are made up of classes of business or specific perils that are often written under stand-alone or specialized insurance policies that usually are assumed under specialized reinsurance contracts intended to reinsure those specific exposures or perils.
But, some of these classes of business or specific perils might arise incidentally as part of the covered peril or exposure in the nonspecialized or broader policy. In those cases, the parties typically intend to reinsure the incidental policy exposure under the reinsurance contract. To make clear the distinction between the assumption of incidental risks or perils and the intentional reinsurance of those risks and perils when written under specific policies, the list of exclusions in a reinsurance contract will often use the following phrase after listing the specific risk or peril excluded: "written as such."
"Written as Such" Defined
The phrase "written as such" has been defined in the direct insurance context by Guy Carpenter in its Glossary of Reinsurance Terms as "[i]nsurance written to cover a specific peril and specifically referred to as such, as opposed to insurance which may incidentally cover the peril, e.g., flood insurance written under a flood insurance policy versus a personal property floater, which would cover flood among a myriad of other perils." This definition attempts to make it clear that the phrase "written as such" excludes only insurance policies that are written to cover a specific peril, but not those policies that incidentally would cover that peril among others. "Attempts" is the operative word. The question is whether adding the phrase "written as such" is sufficient to make it clear what is covered and what is excluded under the reinsurance contract.
Exclusions "Written as Such"
The phrase "written as such" is often used in isolation to establish the specific perils excluded from coverage within a reinsurance contract. For example, a typical formulation of the exclusion clause may provide that "[t]his Agreement does not apply to and specifically excludes the following: Flood and/or earthquake when written as such; crop and hail written as such; boiler and machinery written as such." Although, this exclusion clause sets forth the specific perils—for example, "flood and/or earthquake"—excluded from coverage, there is some ambiguity as to whether the exclusion refers solely to specific stand-alone policies written to cover flood and/or earthquake damage, which are referred to as flood or earthquake policies, or whether the clause also excludes insurance policies broader in scope that may cover flood and/or earthquake damage among other perils.
The problem with using the phrase "as such" is as much a grammatical problem as an ambiguity problem. Research shows that the phrase "as such" only makes grammatical sense when it is used properly. That means the pronoun "such" must have an identifiable antecedent to be correct. In other words, "such" has to refer to another word that can replace it in the sentence so that the sentence makes sense. Grammatically, the use of "as such" in the exclusion above appears correct because "such" can be replaced by "flood and/or earthquake." ("This Agreement does not apply to and specifically excludes the following: Flood and/or earthquake when written as flood and/or earthquake.") Whether that resolves the ambiguity is another question, because it is still not clear whether a policy that covers flood and/or earthquake along with other perils is or is not excluded.
This, of course, is a relevant inquiry given the number of claims that have arisen after Superstorm Sandy and continue to arise with the flooding caused by severe winter storms. Ceding insurers that have paid flood losses as incidental damage under the broad scope of personal lines and commercial policies may wish to cede those losses under their reinsurance contracts. Will the exclusions preclude them? Was the reinsurance contract intended to assume incidental flood damage from these policies? Does the exclusion apply only to stand-alone flood policies? These are the claims questions that arise when "written as such" language appears in a reinsurance contract.
Taking it one step further, consider the recent data breaches. When a CGL policy excludes data breaches or cyber risks "written as such," what is actually excluded, and what falls within the reinsurance contract as incidental exposure? Does a cyber liability endorsement on a CGL contract make coverage for the data breach "written as such" so that it is excluded?
Drafting for Clarity
Drafters of reinsurance contracts should provide greater clarity to reduce the possibility of ambiguity and any resulting disputes. For exclusions, especially those perils that the parties do not want to include when specifically written under stand-alone policies like earthquake or flood, it makes sense to say exactly that. In other words, say what you mean, and mean what you say.
The following exclusion clause, taken from a reinsurance contract for Homeowners' Choice Property & Casualty Insurance Company brokered by TigerRisk and publicly available on the website of the Securities and Exchange Commission, provides an example of a clear and well-drafted exclusion: "This Contract does not apply to and specifically excludes the following: Flood and/or earthquake when written as such for stand-alone policies where flood and/or earthquake is the only named peril." Although this clause identifies the perils to be excluded, "[f]lood and/or earthquake when written as such," it further clarifies the meaning of "written as such" by stating that the exclusion applies only to "stand-alone policies where flood and/or earthquake is the only named peril." The phrasing of this clause makes clear that insurance policies that incidentally cover flood and/or earthquake damage will not be excluded from coverage under this reinsurance contract. While using the phrase "written as such" is probably redundant and unnecessary given the rest of the exclusion, the additional explanatory language enhances clarity of the exclusion and hopefully avoids the ambiguity of using only the phrase "written as such."
Although the phrase "written as such" has been employed in numerous exclusion clauses in reinsurance contracts without serious incident, brokers, cedents, and reinsurers should strive to achieve greater clarity in their drafting to reduce the potential for disputes. As discussed herein, this phrase should not be used in isolation but should be either eliminated entirely or at the very least drafted in conjunction with explanatory text that clearly establishes the exclusion of insurance policies drafted to cover a specific peril as the only named peril and not policies that may incidentally cover that peril.
The author would like to thank Caroline Billet, an associate in Patton Boggs's New York office, for her research and the original draft of this Commentary.
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