Reinsurance

Warranties and the full reinsurance clause

The ‘full reinsurance clause’, as it has come to be known, is in widespread use in facultative reinsurance agreements placed in the London market. Although the wording may vary from case to case, the usual formulation is that the contract is stated to be, in relation to the direct policy, ‘a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Reassured’. This rather arcane language has two functions. The opening words define the terms upon which the reinsurance has been made. The closing words oblige the reinsurers to indemnify the reinsured for settlements which have been reached with the direct policyholder. In recent years attention has focused on the closing words, the courts holding that a settlement must be followed if it has been made by the reinsured in a bona fide and businesslike fashion. The opening words have for some years been assumed to mean that the terms of the direct policy are incorporated into the reinsurance: while there has been much debate as to exactly what terms are incorporated, there has been no serious challenge to the view that the phrase ‘warranted same gross rate, terms and conditions’ is designed to have an incorporating effect. An unsuccessful attempt to overcome that assumption was made before Andrew Smith J in Toomey v Banco Vitalicio de Espana SA de Seguros Y Reaseguros [2003] EWHC 1102 (Comm), forthcoming in [2004] Lloyd’s Rep IR.