In brief - Express provisions are best way to secure inspection
Reinsurers can gain clarity through the process of inspecting
the books and records of their reinsureds. Securing this right
should be done through an express inspection clause which, if it
includes such things as rights to copy, clear and unequivocal
reservation of rights, and clear definitions of materials to be
inspected, may help to minimise future disputes.
Inspection rights grant reinsurers details about claims and
The right of inspection gives reinsurers an exercisable right
over their reinsureds to inspect their relevant books and
Ensuring the existence of inspection rights is necessary for
reinsurers because they are one step removed from the claims
process. Safeguarding the right of inspection for retrocessionaires
is just as critical. Inspection rights are necessary in both
facultative and treaty reinsurance.
Without an inspection right reinsurers can be "left in the
dark" as to the claims they are required to settle or
The right permits the reinsurer to obtain details regarding the
original claim(s) triggering the reinsurance, and the
reinsured's underwriting practices, claims handling and
Inspection clause may be express or implied in contract
The right of inspection is a contractual right arising in the
Inspection rights may arise in two ways:
Express inspection clause – expressly
providing for inspection rights is a common, and preferable, method
of securing the right, for example:
In the event of a claim arising
all papers in connection therewith shall be at the command of the
Reinsurers on this reinsurance or parties designated by them for
inspection (See Pacific & General Insurance Co Ltd (in
liq) v Baltica Insurance Co (UK) Ltd  LRLR 8)
Implied inspection clause –
the right may be implied into a reinsurance treaty (barring any
express term to the contrary).
(See Phoenix General Insurance
Co of Greece SA v Halvanon Insurance Co Ltd  2
Lloyd's Rep 599; Charman v Guardian Royal Exchange
Assurance Plc  2 Lloyd's Rep 607)
Reinsurers should be cautious when relying on an implied right
as it must be proved, and its existence under the law remains
unsettled. Some judges have held that the right of inspection is a
matter of commercial negotiation and must be expressly provided
for. (See Societe Anonyme d'Intermediaries Luxembourgeois v
Farex & Others  LRLR 116 (CA))
Express inspection clause may help to minimise future
Inspection rights should be provided for by way of an express
provision in the reinsurance treaty or contract rather than relying
on an implied term. In the interests of minimising future disputes,
express provisions should be considered for:
The right to copy (as opposed to just inspect) materials.
A clear definition of the scope of the "books" and/or
"records" to be inspected.
A clear and unequivocal reservation of rights when carrying out
A provision to allow for a third party/independent specialist
firm to undertake the inspection (as opposed to the reinsurer
itself carrying it out).
Whether the right of inspection survives termination of the
The right to conduct an audit (when necessary).
A system of informal dispute resolution.
A process for facilitating inspection within a reasonable
Confidentiality agreements, retainers among ways to ensure
Commercially, both reinsurer and reinsured will wish to preserve
goodwill. This may require a reinsurer to take steps such as:
signing a confidentiality agreement prior to inspection, to
prevent the reinsurer divulging the findings of its inspection to
third parties (including any co-reinsurers)
entering into a retainer with the reinsured's lawyers to
preserve any legal professional privilege over contentious parts of
providing the reinsured with an explanation of why it is
exercising the right of inspection (although a reinsurer is not
obliged to do so)
resolving any disputes relating to the approval and/or
facilitation of the inspection in an informal way
Reservation of rights important for reinsurers
Reinsurers should avoid prejudicing their legal position by
always carrying out an inspection under a clear and unequivocal
reservation of rights. As inspection rights are governed by
contract law, exercising the right to inspect the reinsured's
books and records may amount to an election to affirm the existence
of the reinsurance contract. (See Iron Trades Mutual Insurance
Co Ltd v Companhia de Seguros Imperio  1 Re LR 213) This
could mean that any right on the part of the reinsurer to avoid the
contract has been waived. If a without prejudice inspection cannot
be agreed between the parties, and the reinsurer is in a position
to possibly avoid the contract, the reinsurer should consider not
The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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