Reinsurance

Termination of reinsurance agreements

Reinsurance agreements are regularly made for a period of years, subject to annual review. There is an inherent inconsistency between the long-term nature of such agreements and the right to reconsider the position annually, and Charman v New Cap Reinsurance Corporation [2003] EWCA Civ 1372; [2004] Lloyd’s Rep IR 373 is an illustration of the difficulties in interpretation that can arise. The clause that fell to be construed in the present case was roundly condemned by the expert witnesses and Morison J for its lack of clarity. The appeal to the Court of Appeal ultimately turned on whether the clause had properly been invoked, but the Court of Appeal – the leading judgment in which was given by Rix LJ – nevertheless expressed its views on how the clause should be interpreted. The judgment shows that where a review clause appears in a long-term contract, the review process is, if possible, to be construed as an objective one so that the reinsured retains the benefit of long-term protection rather than losing it because agreement at the review stage cannot be reached.