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REINSURING CLAUSES
Ozlem Gurses
University of Southampton
Facultative reinsurance-Reinsuring Clauses
• “As original” (incorporation of terms /back-to-back cover)
• “Follow the Settlements”
• “Follow the Form” (concurrency between original
insurance and reinsurance)
• “Follow the Fortunes” (used interchangeably with follow
the settlements)
Gard Marine & Energy Ltd v Tunnicliffe [2011]
EWHC1658 (Comm),
• Gard subscribed to a 12.5% share of a policy issued to Devon Energy
Corporation
• The policy was against all risks of physical loss or damage to offshore
and onshore property, and business interruption
• The policy was subject to a combined single limit of US$400 million
(for 100% interest), any one accident or occurrence arising out of a
Named Windstorm in the Gulf of Mexico
• The policy stated:
[the] Combined Single Limit of Liability … [and] the Assured's
Retention … shall be reduced proportionately and shall apply in the
same proportion as the total interest of the Assured in said well
hereunder bears to 100% …
Gard Marine & Energy Ltd v Tunnicliffe
• 7.5% of the line was reinsured with Lloyd’s syndicates (Advent’s
share: 2%)
• 5% was reinsured with Glacier Re.
• The reinsurance was “subject to all terms, clauses, and conditions as
Original and to follow the Original in every respect”
• The “Sum Insured” clause in the reinsurance policy provided as
follows:
To pay up to Original Package Policy limits/amounts/sums insured
excess of USD$250 million (100%) any one occurrence of losses to
the original placement.
Gard Marine & Energy Ltd v Tunnicliffe
• Hurricane Rita caused Devon to suffer substantial losses.
• Total loss: US$912.5 million
• Devon’s interest was about 46% : US$416 million
• The claim was settled in the sum of US$365 million
• Gard’s share of the payment : 12.5% proportion:
US$45,625,000.
Gard Marine & Energy Ltd v Tunnicliffe
• Dispute arose in relation to the deductible:
• Two interpretations:
• 1- (100%) in the sum insured clause meant that it was
necessary to “scale” the deductible to match the assured’s
actual interest in the insured subject matter.
• Thus, the deductible would be reduced from US$250
million to US$114 million
• The amount recoverable was US$365 million minus
US$114 million: US$251 million.
• 2% of US$5,020,737
Gard Marine & Energy Ltd v Tunnicliffe
• 2) the deductible was not to be scaled
• The full US$250 million was to be deducted from the loss
of US$365 million: US$115 million.
• 2% of US$115 = US$2,300,000
Construction of reinsurance contracts
• A contract is to be construed in the way that it would have
been understood by a reasonable person having all the
background knowledge which would reasonably have
been available to the parties in the situation in which they
were at the time of the contract
• The reinsurance contract was subject to the same terms
and conditions as original
• It was supported by expert evidence of the market for
insurance of offshore energy risks that the notation
“(100%)” had a specialised and recognised meaning,
namely, that of scaling.
Commercial Union Ins. Co. v. Swiss Reinsurance America Corp.
413 F.3d 121, C.A.1 (Mass.),2005.
• W.R.Grace & Co. (assured) -------Maryland (insurer)
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5 successive one-year policies:
1962-63
1963-64
1964-65
1965-66
1966-67
and two three-year policies from
1967-1970
1970-1973
Excess insurance
• Grace – Commercial Union (Excess insurer)
• Four successive multi-year umbrella policies
• 1962-1965
• 1965-1968
• 1968-1971
• 1971-1974
Excess policies
• [A]ll personal injury and property damage ... arising out of
one event or continuous or repeated exposure to
substantially the same general conditions existing at or
emanating from one premises location shall be deemed to
be one occurrence.
• “Follow-the-form” clauses: “the terms, conditions and
limitations of this policy will not be construed any more
restrictive [sic] than the terms, conditions and limitations
of Underlying Insurance.”
Reinsurance
• Swiss Re issued three multi-year “certificates” to
Commercial Union for the period 1965 to 1974.
• Swiss Re agreed to share 50 per cent of Commercial
Union's first $1 million in loss for “each occurrence”
• Follow-the-form: except as “otherwise specifically
provided” in the certificate-Swiss Re's liability would
“follow” or “be subject” to the “terms and conditions” of
Commercial Union's policies.
• In addition, the Swiss Re certificates contained “followthe-fortunes” provisions
Settlement
• Commercial Union settled with Grace
• (1) that the hazardous waste liability at each site should
be allocated pro rata across the years of relevant
insurance coverage at each site and
• (2) that the $5 million per-occurrence limit in each policy
should be viewed as applying separately to each policy
year, i.e., $15 million for a three-year policy.
• Swiss Re challenged the notion that the per-occurrence
limit applied separately to each Commercial Union policy
year (as opposed to the entire multi-year policy period).
• District court found for Swiss Re on the annualization
issue
First circuit
• Each Commercial Union policy as a whole includes not
only its own anti-annualization language but its own
follow-the-form clause, seemingly invoking the proannualization language of the underlying Maryland policy.
Further, the insured would benefit from the usual canons
of interpretation favoring the policy holder.
• The Swiss Re certificates could have contained a
definition of “occurrence” in relation to continuing leaks,
expressly negating annualization, but Swiss Re chose to
provide no definition at all for this malleable word.
• One could read the Swiss Re policy as adopting the
Commercial Union definition of the term via Swiss Re's
follow-the-form clauses-but which Commercial Union
definition?
• Commercial Union Ins. Co. v. Swiss Reinsurance America
Corp. was distinguished in
Travelers Cas. and Sur. Co. v. Insurance Co. of North
America, 609 F.3d 143 (3rd Cir.(Pa.) Jun 09, 2010)