Keeping the Information Flowing: Loss Notice and Reporting Clauses in Reinsurance Contracts

The Basic Premise of Reporting and Notice

It is axiomatic that information about the underlying policies and the claims flowing from those policies must be provided by the reinsured to the reinsurer. Otherwise, how else will the reinsurer know what premiums to book and what loss amounts to pay? Among the reasons for reporting is that the reinsurer must record on its books for accounting and regulatory purposes all premiums received and all losses and expenses paid. As each reinsurer must report these figures on a periodic basis to its regulators, it therefore must receive premium and loss information in time to prepare its regulatory and financial reports.

Reporting also allows reinsurers to compare the actual results of a reinsurance contract against the representations in the placing information. Should the results begin to deviate, the reinsurer will be able to exercise its right of inspection to determine why the results have deviated. This allows the reinsurer to make rational decisions about whether to continue on the reinsurance contract from year to year or whether to terminate the reinsurance relationship.

Besides basic business record reporting of premium and loss figures, reinsurers often will want to know something about the losses being reported. While most reinsurance contracts do not provide the reinsurer with any right to defend or indemnify the underlying insured, very often the reinsurance contract will grant the reinsurer the right to associate in the defense of an individual claim. If a reinsurer is to exercise its right of association, it must receive notice of the claim in sufficient time to exercise that right in a meaningful way.

Typical Notice and Reporting Clauses

As should be expected, notice and reporting clauses vary greatly from company to company and from intermediary to intermediary. Depending on where and how a reinsurer participates in a reinsurance program, the notice and reporting requirements will differ. There are simple notice and reporting clauses and complex reporting and notice clauses. Sometimes reporting and notice clauses are combined and sometimes they are separated.

Reporting and Remittance Clauses

A typical reporting and remittances clause will require the reinsured to report statistical information to the reinsurer on a quarterly or sometimes on a monthly basis. These reports are merely accounting-type reports that also often show account changes from period to period. Reporting clauses generally require the reinsured to report statistical information on premiums and losses to the reinsurer 30, 60, or 90 days after the close of the reporting period (generally quarterly). These periodic reports generally are accompanied by an invoice that has netted out premiums against losses and either provides payment to or requests payment from the reinsurer based on the net accounting status at the time of the report. Some clauses have special provisions for year-end reporting to coincide with annual regulatory reporting requirements.

Another typical provision is the timing for loss payments should there be a net balance due from the reinsurer. The reinsurance contract will provide the time by which reinsurance balances must be paid. Often the clause will provide that losses of a certain magnitude shall be paid on a more expedited schedule. Not surprisingly, reinsureds often require payment of individual losses paid by the reinsured immediately upon receipt by the reinsurer of an appropriate proof of loss. This is particularly so when the reinsurance contract is a quota share or proportional contract and the reinsured has retained very little of the risk.

Loss Notice Clauses

Loss notice clauses also come in a variety of shapes and sizes depending on the information needs of the reinsurer. In a working layer quota share contract, the reinsurer expects numerous losses and receives most information on a bordereau, which is really just an accounting spreadsheet of total losses without individual loss detail. A higher layer quota share reinsurer or an excess of loss reinsurer, however, may want to know when a loss may reach its layer so it can plan accordingly and consider whether to associate with the defense of the underlying claim. In those cases, the notice clause will require individual loss reporting based on various criteria agreed to by the parties.

A simple notice of loss clause (BRMA 26A) will look like this:

As a condition precedent to recovery hereunder, the Company shall advise the Reinsurer promptly of all losses which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurer.

A more complex loss notice clause looks like this:

Losses shall be reported by the Company in summary form as hereinafter provided, but the Company shall notify the Reinsurer immediately when a specific case involves unusual circumstances or large loss possibilities. Further, the Company shall notify the Reinsurer immediately whenever a claim involves a fatality, amputation, spinal cord damage, brain damage, blindness, extensive burns or multiple fractures, regardless of liability, or whenever a claim is reserved for more than $250,000.

These clauses are typical of liability clauses. In the property context, reinsurance contracts will have time element notice provisions for earthquakes, windstorms, or business interruption claims. Variants of notice clauses occur based on the nature of the business ceded and the layer of the reinsurance participation.

So What Does Promptly or Immediately Mean?

As can be seen from the examples above, when losses need to be reported to reinsurers can be subject to debate. The words promptly and immediately are not words of precision. While one would think promptly and immediately mean right away, things do not necessarily work that way when dealing with insurance and reinsurance. Some commentators claim that immediately can be up to 90 days from the original notice of loss to the reinsured. While that seems a bit far-fetched, if the parties had a course of dealing over years where loss reporting was accepted as long as it was within 90 days, then immediately may take on a new meaning based on the custom and practice between the parties.

What is important to consider from the reinsurer's standpoint is what information does the reinsurer need and when does it need it. Rather than use words like promptly or immediately, both parties are better off being more precise by using a number of days from an agreed upon trigger point. For example, if the reinsurer wants to know about large losses in a medical malpractice treaty as quickly as possible, then the notice clause should be specific as to what triggers notice and the precise number of days by which notice is expected. So in the second example above, while immediate reporting of certain specified injuries without regard to liability is pretty precise, a better choice would have been to say reporting had to be within 30 days from the company's creation of a claim file.

The examples above rely on the reinsured to exercise its good faith judgment as to whether a claim may affect the reinsurer or whether a claim is a large loss possibility. While reliance on your business partner in the reinsurance context should be sufficient, we all know that less subjectivity and more objectivity will provide better results and avoid future disputes. For example, in the second clause, the use of a loss reserve trigger seemingly avoids the problems of subjectivity. But does it? The clause still leaves it to the reinsured to set reserves in good faith. Reserves, as we all know, are subjective and one claim examiner's $100,000 is another claim examiner's $500,000. That makes a big difference if reporting is based on a loss reserve trigger and the reinsurer is unfamiliar with the reinsured's reserving practices.

Conclusion

Reporting and loss notice clauses are often given very little thought when drafting a reinsurance contract. But the failure to draft objective and precise provisions can lead to disputes should things not go well with the reinsurance program. Reinsurers have a right to receive accurate information about the business ceded under the reinsurance contract and the reinsured has an obligation to provide that information in a timely manner. By making it clear what triggers the reporting obligation with specific criteria and by setting a precise time period by which reporting must be made, reinsureds and reinsurers can avoid unnecessary disputes.