Most reinsurance contracts have a provision that allows the reinsurer to inspect or audit the books and records of the cedent or the cedent’s agent. The reasons behind this provision are obvious. The reinsurer needs to know if premiums or losses are being booked and handled correctly given that the reinsurer is indemnifying the cedent for losses under the insurance policies ceded to the reinsurance contract. Where an agents like MGAs or TPAs are involved, audits are even more important because of the third-party nature of the arrangement and because of commission and profit sharing provisions.

The scope of the right to inspection, however, differs by clause. Some inspection clauses are very detailed and some are cursory statements of an audit right. Some restrict rights and some are expansive. As in most cases, the parties only get the rights that they bargained for and included in the reinsurance contract.

In a recent Texas case, a reinsurer brought suit over its right of inspection of the cedent’s managing general agent’s files.

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