Reinsurance: Follow the Settlements

Abstract

Reinsurance is a contract of indemnity between insurance company's defined by a historical relationship. One company, the reinsurer agrees with another, the cedent to indemnify it against a loss, which the cedent has assumed under a separate and distinct contract of insurance. There are two types of reinsurance, facultative and treaty. Facultative involves ceding part or all of an individual policy to a reinsurer as distinguished from treaty, which covers all, or specified classes of reinsured's polices, at a specified percentage. A facultative reinsurance policy offers individual risks to the reinsurer, who has the right (faculty) to accept or reject it. A treaty reinsurance policy is automatic and binds the reinsurer to accept all risks ceded to it of a certain type or category.

A fundamental purpose of reinsurance is to permit an insurer to reduce its reserve requirement. The reinsurance relationship is characterized by the mutual duty of "utmost good faith" and "follow the settlements" which obligate the reinsurer to indemnify the ceding insurer for all loses paid by the ceding insurer on the reinsured policy.

Utmost good faith is the guiding principal of reinsurance. In short, it is a commercial transaction between sophisticated companies governed by equity and utmost good faith.

Because there is not much uniformity between jurisdictions or circuits on reinsurance coverage, it is necessary for counsel to read and understand the case law of jurisdiction that will be applied by the court in deciding the reinsurance coverage dispute.

Keywords: Reinsurance, Indemnity, Faculative Reinsrance, Treaty Reinsurance, Utmost Good Faith