UK: Captives – Does My Reinsurer Have to Pay?

Last Updated: 4 February 2004
Article by Michael Graham

One of the major benefits of establishing a captive is that it is able to gain direct access to the international reinsurance markets. Reinsurers are usually content to reinsure captives provided the terms and conditions of the reinsurance are satisfactory from their perspective.

In view of the concerns of reinsurers about the independence of the captive when handling claims it is common for reinsurers to insist that the reinsurance contains a claims control or co-operation clause. The importance of captives strictly complying with these clauses has been reinforced by the English courts; captives and their managers ignore the guidance given by the courts about these clauses at their peril.

In a landmark ruling, in the case of GAN -v- Tai Ping [2001], the Court of Appeal confirmed reinsurers’ right to make decisions about claims settlements, provided they do not act having regard to arbitrary or extraneous considerations. The decision, which upholds the validity of the widely used claims cooperation clause on the Scor form, has unwelcome implications for captives.

The reinsurance wording in the Tai Ping case contained a claims co-operation clause ("CCC") in the following terms:

"Notwithstanding anything contained in the reinsurance agreement and/or policy wording to the contrary, it is a condition precedent to any liability under this policy that:

(a) the reinsured shall, upon any knowledge of any circumstances which may give rise to a claim against them, advise the reinsurers immediately, and in any event, not later than 30 days;

(b) The reinsured shall co-operate with the reinsurers and/or their appointed representatives subscribing to this policy in the investigation and assessment of any loss and/or circumstances giving rise to a loss;

(c) No settlement and/or compromise should be made and liability admitted without the prior approval of reinsurers".

The Court of Appeal considered four issues concerning the CCC.


The Court of Appeal agreed with the Commercial Court’s decision that as the clause expressly stated that compliance with its terms was a condition precedent to GAN’s liability that effect had to be given to this provision.


The Court of Appeal reversed the Commercial Court’s decision. It commented that the clause had no obvious meaning but believed it was highly improbable that the parties intended this "double hurdle" and that the better interpretation was that there was a breach of the sub-paragraph (c) if the reinsured either settled or admitted liability without the prior approval of the reinsurers. This is an illustration of the court taking a pragmatic approach to the interpretation of a contractual provision rather than merely applying a strictly literal construction.


The Commercial Court held that there was to be implied into the clause on business efficacy grounds, an obligation on the reinsurer not to withhold unreasonably its consent to a settlement reached by the reinsured. Without such an implied term, the Commercial Court reasoned that a reinsurer may never have to indemnify its reinsured unless it decides to do so; the Court of Appeal rejected this approach. It held, nevertheless, that the right of reinsurers to withhold approval of a settlement was not unrestricted. It held that reinsurers must act in good faith after considering the facts giving rise to a particular claim and not act arbitrarily. Furthermore, reinsurers could not withhold their consent to a settlement on the basis of extraneous considerations.

The court gave examples of when a reinsurer’s refusal to approve a settlement could be based on extraneous reasons. Such examples included a refusal unconnected to the merits of the claim in an attempt to influence a reinsured’s attitude in relation to a matter arising under a separate reinsurance or to harm a reinsured as a competitor in respect of other business or in the eyes of a local regulator. The Court of Appeal also made it clear that reinsurers and reinsureds should, in performing their respective roles under subparagraphs (b) and (c) of the CCC, consider the original claim objectively as a whole without regard to their own personal exposure as reinsured or reinsurer. Reinsurers, however, do not have to establish positively that there were reasonable prospects of defeating a claim as a pre-condition of refusing consent.

The court said it had reached its conclusions about the above question because the parties could not be subjected to a reasonableness requirement as this would involve the court substituting its own views for that of the reinsurer.


The Court of Appeal stated that this question raised an issue as to whether the CCC, or in any event sub-paragraph (c) is intended to be a condition precedent to liability of any sort under the policy or a more limited condition precedent only to liability that would otherwise arise under the "follow the settlements" provision in the full reinsurance clause. The Court of Appeal agreed with the Commercial Court’s view that noncompliance with the CCC was indeed a condition precedent to the liability of the reinsurer and noncompliance meant that the reinsured could not recover, even if it could prove that it was liable to indemnify the insured in fact and in law. This part of the judgment has particularly draconian consequences for captives which are in breach of their obligations under similarly worded claims cooperation clauses.

A further potential area of difficulty for captives and their managers is the situation which sometimes occurs when the slip or policy wording contains a follow the settlements clause and a claims co-operation/control clause. The underlying philosophy of a follow the settlements clause is that reinsurers trust the reinsured captive to make settlements, whereas the raison d’etre of a claims co-operation/control clause is that settlements should not be made without reinsurers’ prior approval. The tension between these clauses was an issue which was considered in the Scor case [1985]. The reinsurance in question contained both of these clauses. It was decided by the Court of Appeal that the effect of having these clauses in the same reinsurance is to treat the follow the settlements clause as applicable only to such settlements as are approved by the reinsurers. The follow the settlements clause is, therefore, to all intents and purposes emasculated. From the captive reinsured’s viewpoint, it is clearly unsatisfactory to include these contradictory clauses in the same reinsurance particularly if, wrongly, the captive believes the follow the settlements clause takes precedence over the claims co-operation/control clause.

The legal position concerning claims control/cooperation clauses highlighted by the case law is, generally speaking, unhelpful for captives and good news for reinsurers. Great care needs to be taken by captives in complying with their obligations under the Scor claims co-operation clause and other similarly worded clauses. It is obviously important that captive owners and their managers should be thoroughly familiar with the restrictions imposed by claims co-operation /control clauses contained in their reinsurance protection. This decision has shown that the expectation that many captives have that their reinsurers will invariably follow the settlements which have been concluded with their insureds is misplaced if the relevant reinsurance contains a Scor claims co-operation clause.

The practical consequence of the current case law is that captives should ensure that they have an early and on-going dialogue with their reinsurers about handling claims and, if the relevant reinsurance contains a Scor type clause, they should not conclude a compromise settlement with their insureds without obtaining the prior approval of their reinsurers. If this approval is not given, the safest course of action is for the captive not to agree a compromise settlement and wait to be sued by the insured. This is plainly a commercially unattractive option but unless this course of action is taken by captives, they run a serious risk that they will have to bear any unauthorised settlement for their net account. Alternatively, the captive can agree with its reinsurers that they will take over the defence of the original inwards claim provided reinsurers agree that they will pay the reinsurance claim which is presented if liability is established under the original policy issued by the captive.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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