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...