Reinsurance

Cut-through agreements

It is settled law that in the ordinary course of events the contract of insurance between the assured and the reinsured, and the contract of reinsurance between the reinsured and the reinsurers, are entirely separate undertakings. The most important consequence of this is that if the reinsured becomes insolvent or otherwise refuses to make payment to the assured, the reinsurers cannot face direct liability to the assured. Reinsurance contracts emanating from some jurisdictions include ‘cut-through’ provisions whereby the assured is given a direct cause of action against the reinsurers, although this is generally confined to cases of insolvency. One of the legal objections to this type of clause – that the assured is not a party to the contract of reinsurance and is precluded from relying upon its terms for his own benefit – has been removed in England by the Contracts (Rights of Third Parties) Act 1999. However, other legal objections remain, most importantly the insolvency principle that unsecured creditors must be treated equally: the nature of a cut-through clause is to give the assured, as an unsecured creditor, a prior claim against the reinsured’s assets, namely its potential reinsurance recoveries. The decision of Langley J in Grecoair Inc v Tilling [2004] EWHC 2851 (Comm) raises the question of whether the assured, reinsured and reinsurers had entered into an agreement whereby the reinsurers undertook direct liability to the assured.