Reinsurance contracts, like all other contracts, should clearly express the intent of the parties. The laws of contracts and the rules of contract interpretation apply to reinsurance contracts. For instance, the "parol evidence rule" limits what can be considered when trying to interpret a contract. If a written contract is complete and clear on its face and seems to represent the parties' final agreement, courts often prohibit consideration of any oral testimony that seeks to modify, contradict, or supplement the plain meaning of the contract. Instead, under the parol evidence rule, the contract will speak for itself.
Many contract disputes involve a disagreement between the parties about what the contract requires each party to do or not to do. Thus, many rules relate to interpretation of vague or ambiguous terms. Reinsurance contracts should be clear and unambiguous to avoid expensive arbitration or litigation. It is very important for the parties to carefully consider what risks are being reinsured and make sure that the contract wording reflects their intent. The needs of insurance companies vary based on their books of business, finances, and underwriting policies; therefore, reinsurance contracts need to be tailored to the specific needs of the parties. Knowing the content of the contract and what it covers will provide a smoother relationship between the parties.
Types of Reinsurance Contracts
Facultative reinsurance and treaty reinsurance are the basic types of reinsurance contracts. Facultative reinsurance covers a specific, individual risk, while a reinsurance treaty covers a block of insurance business. Facultative contracts are generally short contracts, and they have a declarations section showing the scope of the coverage. On the other hand, reinsurance treaties are usually long contracts that contain many detailed clauses that describe the reinsurance risk and the responsibilities of the parties. Both facultative contracts and reinsurance treaties are written on a proportional or excess of loss basis.
Business Covered Clause
One of the most basic clauses of a reinsurance contract is the is the business covered clause, and it defines what liabilities are covered by the reinsurance contract. Additionally, the right of "setoff" is available in reinsurance relationships, and many reinsurance contracts often contain setoff clauses that allow the parties to offset debts owed under the contract. Setoff provides a way for parties to cancel mutual debts owed to each other by asserting the amounts owed, subtracting one from the other, and paying just the balance. Setoff can apply to all reinsurance debts owed between the parties under the same contract or any other reinsurance contract between them.
When the Contract Becomes Payable
Because reinsurance contracts are indemnification contracts, the reinsurance is payable only after losses due under the contract are paid. However, an exception to this general rule involves insolvency. Most reinsurance contracts contain and insolvency clause, which is usually required by statute or regulation. Under an insolvency clause, in the event of the an insurer's insolvency, the reinsurer must to pay its reinsurance obligations under the contract whether or not the insurer has paid its obligations.
Many reinsurance contracts also contain an arbitration clause, which describes an agreement between the parties to utilize an unofficial tribunal of their own choosing, such as an arbitration or mediation, rather than a court of law, to resolve their disputes. Finally, because many reinsurance contracts involve parties from different states or countries, they may contain a choice of law clause, which specifies the law of which state or county will govern any disputes between the parties.