For A Surprised Reinsurer, That First Step Can Be A Big One

When a reinsurer discovers facts contrary to those it contemplated when making its reinsurance contract, the first step it makes to address the problem can be critical.

Suppose a ceding insurer has specifically represented that the policyholder would comply with recommendations made in an engineering survey. Also suppose the reinsurer later discovers that the policyholder had rejected most of these recommendations when the insurer made this representation and that the insurer knew it. This could be a good case for rescission of the reinsurance contract.1 But suppose the reinsurer then cancels the contract. This action could kill any chance for rescission.2

How does a surprised reinsurer avoid a misstep that forfeits a chance to rescind an reinsurance contract?

Do The New Facts Justify Rescission?

To avoid a misstep, a reinsurer must be aware that the circumstances may justify rescission. The law governing rescission of a reinsurance contract is not simple (for example, the doctrine of uberrimae fidei imposes an obligation of utmost good faith that is specific to reinsurance), and the outcome of disputes over rescission are heavily fact dependent. Nevertheless, a short checklist of questions may be useful to identify situations where rescission may be appropriate. First, are the newly discovered facts contrary to an explicit understanding with the ceding insurer?3 Second, even if they are not contrary to an explicit understanding, are the newly discovered facts contrary to an implicit understanding, i.e., would a prudent underwriter have considered them important to the risk and relied upon them in accepting or pricing the business?4 And third, do the newly discovered facts substantially change the risks assumed by the reinsurer?5

If answers to these questions are positive, a reinsurer would be well advised to proceed cautiously. Seemingly appropriate actions may diminish the reinsurer's rights irretrievably.

Losing The Right To Rescind

Rights to rescind have been lost, for example, where the reinsurer, shortly after learning of the facts, cancelled or terminated the contract rather than declaring the contract rescinded.

In Wise, Ltd. v. Grupo National Provincial SA6, the court rejected a reinsurer's claim of rescission because the reinsurer had issued a notice of cancellation after a large loss. The reinsurer accepted coverage for a shipment of cargo that was described, because of a mistranslation, as "clocks," when the cargo in fact...