Reinsurers' Rights To Inspect - A Closed Door?

Originally published in March 2002

The purpose of inspections by reinsurers is to "allow the reinsurer, who was exposed to some extent to liability which may be difficult to quantify at any given time, to monitor the manner in which the insurance company was writing business1 ", per Keane J. Simple, or is it?

Information critical to reinsurers' management and development of the underlying business is often limited to monthly or quarterly bordereaux of claims and premiums and the business being ceded may provide for a whole range of different terms, conditions and attachment points. If reinsurers are to be certain of what they are protecting, capable of monitoring their own exposure and making their own retrocessional recoveries they must ensure in advance that they are able to carry out the necessary inspection and audit of their cedant's books and records.

Before embarking on an inspection, there are a number of areas, both legal and non-legal, which must be considered:

Is there a contractual right to inspect, express or implied?

Are there any restrictions on the scope of the inspection?

What steps should be taken to protect reinsurers' position?

How should the audit be conducted?

Can reinsurers inspect?

Assuming that no provision is made in the slip or wording, are reinsurers able to invoke inspection rights? In Phoenix v Halvanon2 , reinsurers sought to conduct an inspection where no express provision existed. Hobhouse J found that, on the principle of business efficacy, there must be an implied duty on a cedant to "obtain, file or otherwise keep in a proper manner, all accounting, claims and other documents and records and make them reasonably available to the reinsurer". By contrast, in SAIL v Farex3 a full wording had been agreed but without an inspection of records clause. Hoffman LJ's observations illustrate the court's position that, if reinsurers feel aggrieved over their entitlement to information, there is only one person to blame:

"Reinsurers are free to stipulate for whatever rights of inspection they please. It is a matter of commercial negotiation between the parties this is a commercial risk which they accepted at the time when the contract was made if there is a need to find better evidence because of difficulties for reinsurers, they are at liberty to stipulate for greater access to information."

If certainty is required (and given the plethora of disputes arising from contractual uncertainty it should be a pre-requisite), reinsurers must always ensure that they know what their inspection needs are and ensure that this is reflected in the wording.

Scope of entitlement

As the onus is on the parties to agree the scope of an inspection of records clause, a...