Always read the contract—at least that is what the experts say and best practices advice. The trouble with that sage advice is that sometimes the contract is not as clear as it could be.
Ambiguities, as we have discussed before, see "Adventures in Contract Wording: The Effect of Ambiguous Reinsurance Contract Language," lead to problems and sometimes disputes.
Who Has the Burden of Proof?
When a contract dispute goes to court over an ambiguity, one party has the burden of proving its case. The same is true in reinsurance arbitrations, but the rules are more relaxed, and most arbitrators don't sweat the burden of proof issue. Nevertheless, the parties need to put forth what they can to prove their view of how the contract should be interpreted.
Typically, the plaintiff or the petitioner has the burden of proof. When the issue is proving the existence of a contract, the burden is on the plaintiff to show that there is, in fact, a contract between the parties. In the reinsurance context, things are no different. The party seeking to recover under the reinsurance contract typically has the burden of proof.
If a ceding insurer is seeking to collect reinsurance recoverables from an assuming insurer, the ceding insurer has to prove that there is a real contract between the parties and that the facts and circumstances demonstrate that the payment is required under the contract. Assuming credible and sufficient proof is provided, or there is no issue about whether the parties entered into a real contract, then the ceding insurer must prove that it paid an underlying claim or expense that comes within the reinsurance contract and that a proper billing was delivered to the assuming reinsurer in a timely manner.
Very often the dispute is not about the billing itself but whether the payment was a proper payment under both the underlying insurance contract and the reinsurance contract. Again, in the first instance, the ceding insurer has the burden to show that the payment was made under a policy that is reinsured by the reinsurance agreement and that the payment was proper within the terms and provisions under both contracts. The burden then shifts to the assuming insurer to prove that payment was improper or that there is some other basis to refuse payment under the contracts.
In direct insurance disputes, it is well known that the insurance company seeking to avoid a claim payment has to prove that an exclusion to coverage applies. All the policyholder has to prove is that there is an insurance contract and there is a claim that falls within the coverage grants of the contract. It is the insurance company's burden to prove that an exclusion precludes coverage.
Similarly, in a reinsurance dispute, where the assuming insurer is claiming an exclusion under the reinsurance contract (or otherwise) applies, the burden falls on the party seeking to get out of the contractual obligation—the assuming insurer—to prove facts to show that payment is not required.
Where one party seeks to terminate the reinsurance contract, the party claiming the right to terminate has the burden to prove that termination is permitted and appropriate under the terms and provisions of the reinsurance agreement. This is true even if, for example, the ceding insurer brings an arbitration seeking an arbitration award declaring that the assuming insurer's attempt to get out of the contract by termination is ineffective and a breach of the reinsurance agreement. Because the assuming insurer is looking to avoid a contractual obligation, it becomes the assuming insurer's burden to prove that termination is permitted under the reinsurance contract.
How To Prove the Contract
In most cases, there is no real dispute about the contract. In court, the plaintiff will have to show through business records and appropriate testimony that there is a contract. Alternatively, the parties may stipulate to the existence of the contract.
In a reinsurance arbitration, the parties typically put the reinsurance contract in as an exhibit to the prehearing briefs and use the contract throughout the proceeding. In most cases, the arbitration panel will ask the parties to provide the reinsurance contract to the panel at the early stages of the arbitration.
Because reinsurance disputes can involve multiple reinsurance contracts with multiple amendments and attachments, and ones that are decades old, coming up with an agreed-upon contract set is not always easy. The older the reinsurance contract, the more likely it is that it will be missing amendments or schedules or that it will be unsigned. But, unless there is a real dispute about the existence of the reinsurance contract or a particular amendment, small errors or missing documents are not usually problematic.
Where there is a real dispute about whether the parties entered into the contract, then the proponent of the contract will have the task of locating enough evidence to convince the arbitration panel that the contract did come into existence. This might require archive searches and assistance from the reinsurance intermediary if one was used to place the reinsurance.
To prove the contract, there will need to be enough documentary evidence and testimony to show an offer and acceptance, and sufficient terms and conditions to be able to understand how the contract operates. Proof might be found in the underlying insurance contract if the reinsurance was facultative. Alternatively, it may be pieced together from correspondence (today, emails; back in the day, facsimiles or cables).
Incorporated Terms
Many contracts expressly incorporate terms and provisions from other contracts or documents. Reinsurance contracts may do this as well. This may complicate determining the meaning of specific terms and provisions of the contract. Ambiguities can easily arise from incorporated wording.
A facultative certificate, which is typically a short form contract, may incorporate the terms and conditions of the underlying insurance policy it reinsures. Many reinsurance contracts expressly state that the reinsurer must follow the form of the underlying contract. This is particularly true in reinsurance structures that are meant to be back to back with the underlying insurance policy.
An excess-of-loss reinsurance treaty might incorporate the terms and conditions of the underlying reinsurance contract that reinsures the lower limits of the underlying policy. For example, if a direct insurer issues a primary policy for $1 million and a following form excess policy for $2 million excess of the underlying $1 million primary policy, the direct insurer—now the ceding insurer—may structure its reinsurance to follow the underlying pattern. It may purchase a facultative certificate for a portion of the primary policy and another, following form facultative certificate for a portion of the excess policy.
Another example of incorporation in the reinsurance context might occur is where the assuming insurer buys its own reinsurance and retrocedes part of its assumed risk to another assuming insurer (a retrocessionaire). In that case, the retrocessional contract may attach or incorporate the underlying reinsurance contract.
For an incorporation to be effective, the contract must make clear reference to the incorporated document and describe it in terms that clearly identifies the document. Some contracts go further than merely referring to another document. Some contracts expressly attach the other document. With a provision expressly attaching another document and with the document actually attached, there can be no doubt about the other documents applicability. But how it works in a specific context may not be as clear.
Dual Incorporation
Another way to make it clear that the terms of another document are incorporated is not just to attach it but to state expressly that all the terms and provisions of the other document are applicable to this contract as if those terms were contained in this contract. This has been called dual incorporation by some courts. This has been used in some reinsurance contracts, and at least one court that has reviewed dual incorporation provisions in a retrocessional context has stated that it was sufficient to allow the underlying contract's arbitration provision to apply to the retrocessional contract.
The dual incorporation provision emphasizes that not only is the referenced document attached and made a part of the contract but that all the terms and provisions of that document are applied to this contract as if those terms and provisions were contained in this contract.
Often these provisions state that there is a limit to incorporation. Obviously, there are terms and provisions of the contract that are different from the underlying document, so these provisions provide that the incorporation applies except as amended by the contract.
Does Incorporation Solve the Ambiguity Problem?
Incorporating terms and provisions from another document is helpful in clarifying how to interpret the main contract. But if the main contract does not clearly specify what provisions take precedence when there seems to be an overlap, then ambiguities arise.
A provision that says, "except as amended by this agreement, all terms and provisions of the other agreement apply" is only helpful if "this agreement" specifies what it is amending from the other agreement. When it does, the main agreement will have language such as "section 2 of the referenced document is amended as follows." Without that language, the parties are left to fight over conflicting provisions.
While the general rule is that a later-signed document's terms will prevail and a more-specific provision will prevail, it is not always very easy to make the distinction. For example, if an incorporated reinsurance agreement has an inspection of records clause and the retrocessional agreement that incorporates the underlying agreement has its own inspection of records clause, which one prevails if there is a dispute between the retrocedent and the retrocessionaire?
The answer may be that the provisions have to be read together and reconciled; it all depends on the language.
Conclusion
There is no doubt that reinsurance contract wording has improved markedly over the last several years. Nevertheless, most reinsurance disputes involve older contracts, and some of those contracts have ambiguities. While the burden of proof often rests with the contract's proponent where the other party is claiming relief from compliance, the burden of proof generally shifts.
Incorporated wording adds complexity to determining the meaning of specific terms and provisions of the contract. Lack of clarity may cause ambiguities to rise if it is not clear what provisions of the main contract control over the incorporated provisions.
The bottom line is the contract needs to be read in its entirety and in the context of the structure of the agreement, any incorporated terms and provisions, and with consideration of the customs and practices of the industry.
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