REINSURANCE - COMMUTATIONS

(Korea Foreign Insurance Company v Omne Re SA, 1999, unreported)

There is no formal judicial definition of the term ‘commutation’ in the reinsurance context, although the term as generally understood means the replacement of the actual rights of the parties under a reinsurance agreement with a substituted agreed liability. The result is, therefore, the same as any other settlement of contested liability: the original agreement is replaced with a new agreement which defines the reinsurer’s liability and which is enforceable by both parties. Commutations in practice give rise to considerable difficulty where the reinsurer has retroceded its liability and the retrocessionaire refuses to accept the commutation as a bona fide settlement: the solution to a dispute of this nature will to some extent depend upon the extent to which the retrocessionaire has agreed to follow the settlements or fortunes of the reinsurer. The decision in Korea Foreign Insurance Company v Omne Re SA, 1999, unreported (forthcoming in Lloyd’s Rep IR) raised an issue as to the effect of a commutation agreement as between the parties to it: if the reinsurer refuses to honour the commutation agreement, does the reinsurer have the right to revert to the reinsurance agreement and thereby to seek to put the reinsured to proof of loss and potentially be confined to a sum smaller than that settled under the commutation?