UK: The Sub Prime Crisis: Potential Issues For The Reinsurance Market

Last Updated: 12 March 2008
Article by David Abbott

The sub prime crisis is constantly developing. In this article, we look at issues which reinsurers may want to consider in relation to claims arising from sub prime liabilities.

As banks reveal increasing exposure to sub prime debt, the (re)insurance industry is reviewing how it is affected. Although for the reinsurance market claims problems are a way off and specific issues are difficult to predict, it is worth highlighting some potential areas to which reinsurers could give consideration when thinking about their reaction to claims relating to sub prime investments and liabilities.

Touching very briefly on the cause of the problems, sub prime debt has been pooled and sold on, organised into tranches and sold again or become the subject of credit default swap products. These complex securitised structures are underpinned by real assets. If those assets lose value, so do the securities which use them for collateral.

In the (re)insurance market immediate hurt is being felt on assets, by those involved in credit default swaps or other similar instruments and by those backing bond insurers. D&O and E&O claims are undoubtedly in the pipeline. Although the (re)insurance market is still liquid from the gains of the last few years, there may be liquidity issues arising if new capital is needed. Also affected are ART deals relating to sub prime debt such as the insurance of credit default swaps. If liability and contractual rights relating to ART contracts are being reviewed it is worth remembering that in order to assess these issues properly one needs to consider whether the contract in question is governed by insurance law or the general law of contract. If a contract is of insurance (containing uncertainty, insurable interest and some element of risk transfer), the duty of good faith and the law relating to breach of warranty will apply.

The reinsurance press suggests that this (in terms of global size of loss) does not spell catastrophe for the reinsurance market. Nevertheless, it is important for reinsurers to be aware of the areas where there is potential for impact, now or in the future.


If a loss in the value of a debt and the subsequent fallout is the subject of litigation there may be many potential targets. It may well be that reinsureds would attempt to aggregate claims relating to each of these liability losses where they all stem from the loss in value of a debt or collapse of a fund. How one aggregates will depend upon the wording. Where there is an event/occurrence wording the question will be 'what is the event to which the losses may be aggregated?' Caudle v Sharp (1995) held that to be an event the common factor must be capable of creating legally relevant consequences - the event must be causative of the loss.

This raises the question of what is it that causes the loss? There is clear argument that each act of negligence causing liability causes the loss on the insurance policy, not the background to which the liability relates. American Centennial Insurance Company v Insco Limited (1996) is an illustrative case. The reinsured claimed to be entitled to aggregate a number of losses on the basis that they all arose out of the same event; the collapse of a fund. However, the judge said that Insco's liability depended in each case upon the omissions of the directors, officers and auditors concerned. It was these acts or omissions rather than the subsequent collapse of the fund which rendered Insco liable. Arguably, an attempt to aggregate D&O losses, auditors' and other advisers' losses following a particular fund collapse may be difficult for similar reasons.

If the reinsurance aggregates on the basis of an "originating cause", the potential for aggregation is broader. This may cause difficulties where policies are not "back-to-back". If a reinsurer aggregates losses inwards on an originating cause basis and has retrocessional cover which aggregates on a per event basis, there may be a gap in cover.


The reinsured must show that the losses sustained have occurred during the period of reinsurance. This is of particular relevance to "Losses Occurring During" policies. If it is established that poor decisions were taken over a period of time leading to sub prime losses, it may be difficult to say which decisions/actions caused which losses. The courts may take the practical approach to allocation, (they have previously allocated equally between years), and establishing a timeline will be important.


Notification provisions are common in reinsurance contracts. They are often expressed as conditions precedent and therefore breach of such a clause will allow the reinsurer to reject the claim. Accordingly, it can be crucial to determine whether a notification clause has been complied with. Standard clauses require notification upon knowledge of any losses which may give rise to a claim. This raises the question: what constitutes a 'loss' for the purposes of the clause? In AIG v Faraday (2007) the Court of Appeal held that 'loss' meant not the insured's (or reinsured's) settlement but the underlying loss - in that case a fall in the share price following a restatement of accounts - which might cause legal proceedings. In this situation reinsureds face some difficulty deciding when to notify. Should they notify upon the write-down of assets which their insureds advised on? Certainly they should consider notifying early.

Follow the settlements

Reinsurers may also wish to look at their follow settlements provisions. Absent any follow settlement wording, and in some cases, even where a clause is in place, the reinsured must prove their loss. Where there is a follow settlements clause which does not require the reinsured to prove the loss, it must still show that the loss was settled in an honest and businesslike fashion and within the terms of the reinsurance contract. If insurers in the US yield to any pressure to pay losses which fall outside policy terms, or do not take obvious defences, they may face difficulty in collecting from reinsurers.

It is difficult accurately to predict whether these will cause problems for the market. One thing that can be said is that there are constant developments in the sub prime and credit crunch crisis and we hope that this article provides useful food for thought.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.