In Reinsurance, the Contract Wording Should Control

In some reinsurance disputes, there is often tension between the words of the reinsurance contract and what one of the parties say they intended to reinsure. On the one hand, a reinsurance agreement is a contract and, in court, is enforced like any other contract based on the plain and unambiguous contract language. On the other hand, reinsurance traditions rely on custom and practice and some reinsurance contracts provide that the agreement should be interpreted as an honorable engagement and not merely as a legal obligation.

I recently handled a reinsurance dispute where one side argued that the reinsurance contract only covered a certain type of loss and the other side argued that the coverage grant in the reinsurance contract was broad enough to cover another type of loss as well. The case was essentially a battle between what the unambiguous words of the contract provided in plain English and what one party believed was the original intent of the parties. The case, as is typical, was before an arbitration panel and not in court.

One side focused its evidence and testimony on the unambiguous contract terms and conditions. Witnesses for the other side admitted in depositions and at the arbitration hearing that the words of the contract were broad enough to include the type of losses that the other side claimed were covered. But that side and some of their witnesses argued and testified that this was just a drafting error because the parties’ intent was otherwise.

While one side did not want to get into the negotiation of the contract and only wanted to focus on the unambiguous plain wording of the reinsurance agreement, the contract lacked an integration or merger clause (which is pretty typical, especially of older reinsurance contracts) so evidence of the negotiations of the contract and its placement was allowed by the arbitration panel.

The reinsurance agreement had a governing law clause, but the arbitration clause did not mandate that the arbitration panel look to substantive law. But, if the arbitration panel did rely on law, it had to follow the law in the governing law clause. The reinsurance contract did not have an honorable engagement provision, but the arbitrators’ decision was to be made considering the custom and practice of the insurance and reinsurance business.

Ultimately, when the negotiation evidence was examined carefully, it was clear that the parties always intended the contract to cover the broader type of loss. The negotiating reinsurance underwriter had originally sought the narrow limitation but ultimately dropped that requirement for the broader language in the signed reinsurance contract. The arbitration panel was able to see the relationship between the negotiations and the final contract wording and recognized that the reinsurance contract covered more than the narrow set of losses.

The contract drafting lesson here is clear. If the parties only want to cover a narrow set of losses, the relevant loss definition should be clear and specific. Contracting parties should not rely on what someone thought they intended but should draft the contract to express accurately the scope of coverage. If a certain type of loss is not to be covered, then a clear exclusion should be drafted to conform with the parties’ intent. Relying on negotiations and placing information is not a formula for successfully avoiding disputes.