Lloyd's Maritime and Commercial Law Quarterly

Professor Francis D Rose

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ON THE USE AND ABUSE OF CUSTOM AND USAGE IN REINSURANCE CONTRACTS

William Hoffman*

At common law, a litigant asserting that industry practice or trade usage affects the meaning of a contract must prove iter alia that the practice or usage prevailed in the relevant market at the time of contracting. This proof requirement is critical for reinsurance contracts, which often rely on usage for meaning. However, a few American courts have misapplied or even ignored these standards in recent reinsurance cases, creating questionable precedent for future cases. This article analyses the proof requirements applicable to reinsurance usage and then takes an in-depth look at two areas in which American market reinsurance usages have been at issue.

The common law’s malleability to suit the necessities and usages of the mercantile and commercial world is one of its most valuable characteristics: Mercer County v. Hacket (1863) 68 US 83, 95 (Grier, J.).

* Member of Underwriting, Swiss Re New Markets, Zurich, a division of Swiss Reinsurance Co.; member of the State Bar of California. Opinions expressed in this article are those of the author and do not necessarily reflect the practices or usages of Swiss Re.

The following abbreviations are used for the materials specified:

Affiliated: Affiliated FM Ins. Co. v. Constitution Reinsurance Corp. (1 September 1992) No. 89-2411 (Mass. S.C.); rev’d (1994) 416 Mass. 839; 626 N.E. 2d 878.

Black: Black’s Law Dictionary, 6th rev. edn (1990).

Christiana: Christiana General Ins. Co. v. Great American Ins. Co. (1990) 745 F. Supp. 150 (S.D.N.Y.); rev’d (1992) 979 F.2d 268 (2d Cir.).

Corbin: Arthur Corbin on Contracts (1960).

Custom & Trade Usage: Note, “Custom and Trade Usage: Its Application to Commercial Dealings and the Common Law” (1955) 55 Col. L.R. 1192.

Gerathewohl, Reinsurance: Klaus Gerathewohl, Reinsurance—Principles and Practice (1980) (English translation).

Gerathewohl, Rückversichering: Klaus Gerathewohl, Rückversichering—Grundlagen und Praxis (1976) (in German).

Hoffman: William Hoffman, “Common Law of Reinsurance Loss Settlement Clauses: A Comparative Analysis of the Judicial Rule Enforcing the Reinsurer’s Contractual Obligation to Indemnify the Reinsured for Settlements” [1994] LMCLQ 47; (1993) 28 Tort & Ins. L.J. 659. Ile de France: Compagnie de Reassurance d’Ile de France v. New England Reins. Corp. (1995) 57 F.3d 56 (1st Cir.), cert. denied 133 L. Ed. 2d 490; 116 S.Ct. 564; on remand (1996) 944 F. Supp. 986.

Kramer: Henry Kramer, “The Nature of Reinsurance” in R. Strain (ed.), Reinsurance 1,

Levie: “Trade Usage and Custom Under the Common Law and the Uniform Commercial Code” (1965) 40 N.Y.U.L.R. 1101.

National American: National American Ins. Co. v. Certain Underwriters at Lloyd’s London (1996) 93 F.3d 529 (9th Cir.).

Salm: Robert Salm, “Reinsurance Contract Wording” in R. Strain (ed.), Reinsurance (1980), 79.

Staring: Graydon S. Staring, Law of Reinsurance (rev. edn 1997).

Williston: Samuel Williston, 5 Treatise on the Law of Contracts (1961 & Supp. 1995).

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