Bermuda is home to one of the largest international insurance and reinsurance markets in the world. This article outlines the current regulatory framework for the conduct of insurance and reinsurance business in Bermuda; the law relating to the resolution of insurance claims and coverage disputes; the law relating to reinsurance disputes and arbitration; and key reinsurance principles and practices under Bermuda law.
1 Regulatory agencies
Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.
The Bermuda Monetary Authority (BMA), a body corporate independent of government, determines applications for registration of insurers under the Insurance Act 1978 (the Act), and supervises, regulates and inspects insurers registered under the Act. It has jurisdiction to propose and to bring into effect subsidiary legislation prescribing prudential standards for insurers. It publishes Codes of Conduct setting governance, risk management and business standards with which insurers registered under the Act must comply. It also has a range of enforcement and disciplinary powers.
The Minister of Finance has jurisdiction under the Act to exempt classes of insurance business or to exempt a class of persons from the pro visions of the Act, to determine the value of assets or liabilities for the purposes of the Act, to prescribe information that insurers must report in their regulatory returns, and to prescribe prudential requirements except where the BMA has this authority. The Minister also has jurisdiction under the Non-Resident Insurance Undertakings Act 1967 to grant permits to non-resident insurers, and jurisdiction under the Companies Act 1981 to grant permits to overseas companies allowing them to carry on a range of international business in Bermuda.
Finally, the Registrar of Companies, an emanation of the Finance Ministry, determines applications for registration of companies and maintains a public register of companies incorporated in Bermuda and permit companies.
2 Formation and licensing
What are the requirements for formation and licensing of new insurance and reinsurance companies?
Any person seeking to be registered as an insurer must satisfy the BMA that it will meet 'minimum criteria' scheduled to the Act, will meet the minimum margin of solvency for insurers in their 'Class', that their assets will meet the statutory liquidity ratio for their Class, and, if they are to be registered as a commercial insurer, that they will meet the enhanced capital requirement (ECR) for insurers in their Class.
The minimum criteria are (in summary) that 'officers' and 'controllers' of the insurer are fit and proper persons to perform their functions, that there are in place corporate governance policies appropriate for a business with the nature, size, complexity and risk profile of the insurer, that a minimum of two individuals will effectively direct the business of the insurer, that there will be an appropriate number of non-executive directors on the Board of Directors of the insurer, that the business of the insurer will be conducted in a prudent manner, that there are no 'group' risks that will prevent effective supervision of the insurer by the BMA, and that the business of the insurer will be carried on with integrity and the professional skills appropriate to the nature and scale of the insurer's activities.
The classification of insurers is a key feature of the Bermuda regulatory regime, allowing as it does for graduated levels of regulation of insurers based on their size, complexity and other risk profile features. The most fundamental difference in regulation lies between the regulation of captives and the regulation of commercial insurers. Captives are subject to a less onerous regime than commercial insurers.
However, there are further nuances in regulation within those broad categories, again based on the peculiar risk profiles of different classes of insurer.
Captives themselves are subject to sub-classification into classes reflecting whether they are single-parent (Class 1 for general business captives, Class A for long-term business captives) or multi-parent (Class 2, Class B), and how much 'unrelated' business the captive writes. For example, a Class 1 captive may not write unrelated business, whereas a Class 3 captive may write more than 20 per cent (but less than 20 per cent) unrelated business.
Commercial insurers subdivide into three classes depending on volume of net premiums written from unrelated business (Class 3A or 3B; Class C, D or E) or depending on minimum statutory capital and surplus of the insurer (Class 4, which requires minimum statutory capital and surplus of Bda$100 million). Bermuda's regulation of insurers was determined to be officially equivalent with European Solvency II on 24 March 2016 (when the European Commission's adoption of a Delegated Act recommending full equivalence was confirmed). The regulatory regime applicable to Bermuda captives is not Solvency II equivalent.
Normally, a promoter seeking to a register as an insurer will make a 'pre-incorporation' application made to the BMA, which must include details of the proposed controllers of the body corporate, a business plan and a five-year financial projection, and other materials. A separate, parallel application must be made to the Registrar of Companies seeking to register the body corporate.
3 Other licences, authorisations and qualifications
What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business?
A person must be registered by the BMA as an insurer if they intend to carry on insurance business in or from within Bermuda. Exactly what insurer licence they require will be determined in the first instance by whether the insurer is to be a captive insurer or commercial insurer (see question 2).
A third category (in addition to captive insurers and commercial insurers) of insurer is the 'special purpose insurer', which writes insurance business under which an insurer fully funds its liabilities to persons insured through the proceeds of a subordinated debt issuance or other financing approved by the BMA, cash and time deposits.
Insurers may be local companies (at least 60 percent of their share capital is owned and controlled by Bermudians), exempted companies (which may be owned and controlled by international controllers) or permit companies (companies incorporated overseas and granted a permit by the Minister of Finance to carry on a limited ranged of international business in Bermuda).
4 Officers and directors
What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?
Controllers must be fit and proper persons to discharge their functions as controllers. A proposed director or officer must have relevant expertise, sufficient skills, knowledge and soundness of judgement properly to undertake and fulfil the particular duties and responsibilities of his office.
The BMA will also consider whether the officer will devote sufficient time and attention to his or her duties and responsibilities necessary to fulfil those duties and responsibilities diligently. In assessing soundness of judgement, the BMA looks to inter alia the degree of balance, rationality and maturity demonstrated in the proposed officer's previous conduct and decision-taking. The BMA also regards the probity of the proposed officer, particularly a person proposed to be the chief executive officer or managing director of the insurer.
Although it need not be in the possession of the board of directors, the insurer must have or have available to it, 'adequate knowledge and expertise'.
The board of directors of a captive insurer, especially a single-parent captive insurer, will frequently not possess the necessary skills and experience to conduct the business of the insurer unaided. In that instance, it is common for the insurer to appoint an insurance manager to whom senior functions of the insurer will be outsourced.
5 Capital and surplus requirements
What are the capital and surplus requirements for insurance and reinsurance companies?
Insurers must maintain assets equal to a minimum margin of solvency. For captives carrying on general business, the minimum margin of solvency is calculated by reference the greater of net written premiums and discounted loss reserves and other insurance reserves, subject to a minimum floor of Bda$120,000. For commercial insurers, it is the greater of the aggregate of 20 per cent of net written premiums up to Bda$6 million and 15 per cent of new written premiums thereafter, 15 per cent of assets reported on the insurer's statutory financial statement, and 25 per cent of the insurer's ECR, subject to a floor of Bda$1 million for Class 3A and 3B insurers or Bda$100 million for Class 4 insurers. For insurers carrying on long-term business, the minimum margin of solvency is a proportion of assets reported on the insurer's statutory balance sheet subject to a floor of Bda$120,000 for captives and 25 per cent of the insurer's ECR for commercial insurers.
Commercial insurers are in addition required to maintain assets sufficient to capitalise their ECR based on the Bermuda Solvency Capital Requirement, a complex formula that takes into account a wide range of underwriting, operational and balance sheet risks.
What are the requirements with respect to reserves maintained by insurance and reinsurance companies?
A component of the insurer's duty to conduct its business in a prudent manner (one of the minimum criteria of registration) is that it maintains sufficient capital to enable it to meet its insurance obligations given the size, business mix, complexity and risk profile of its business.
All insurers carrying on general business other than single-parent captives (except where directed by the BMA) must appoint a loss reserve specialist approved by the BMA and who must be a person qualified to assess the adequacy of insurance loss reserves.
An insurer carrying on long-term business are required to appoint an individual approved by the BMA qualified to assess the adequacy of the total long-term insurance reserves or long-term insurance technical provisions, as that insurer's approved actuary.
As a result of its obligation pursuant to section 18 of the 1978 Act to make statutory financial returns, every insurer must maintain 'adequate' reserves. The reserves may be discounted by the amount of any recoverable reinsurance provided that the directors make allowance for any such amounts the collection of which is in their opinion doubtful.
7 Product regulation
What are the regulatory requirements with respect to insurance products offered for sale? Are some products regulated by multiple agencies?
The BMA regulates insurance business, not insurance contracts. Furthermore, given the vast majority of the risks written by Bermuda insurers are risks of international commercial entities (the local 'domestic business' market representing a negligible proportion of premiums written), the regulation of conduct in the sale of products is limited.
8 Regulatory examinations
What are the frequency, types and scope of financial, market conduct or other periodic examinations of insurance and reinsurance companies?
There is no prescribed frequency of 'examinations' of insurers. The BMA conducts routine off-site and on-site inspections at the frequency that it deems necessary for it to discharge its duties in relation to each insurer. Insurers writing a substantial amount of unrelated business receive considerably more scrutiny than captives.
What are the rules on the kinds and amounts of investments that insurance and reinsurance companies may make?
Each insurer must manage its investments in a sound and prudent manner that is consistent with the risk profile of the insurer. The board of directors of the insurer is required to establish and maintain investment policies, standards and procedures that a reasonable and prudent person would apply in respect of a portfolio of investments to avoid undue risk of loss and obtain a reasonable return. Insurers are required to have an overall strategic investment policy for both on-balance sheet and off-balance sheet items. The insurer's risk management systems should cover the risks associated with investment activities that might affect the coverage of technical provisions and solvency margins. Insurers should have in place adequate systems of internal controls to ensure the safeguarding of assets, that investment activities are properly supervised and adherence to the investment policy as well as in compliance with legal, accounting and regulatory requirements.
10 Change of control
What are the regulatory requirements on a change of control of insurance and reinsurance companies? Are officers, directors and controlling persons of the acquirer subject to background investigations?
A shareholder or prospective shareholder must notify the BMA of its intention to be allotted or to receive by transfer shares in an insurer whose shares or whose parent's shares are not traded on any stock exchange (a private company) sufficient to make the person a 10, 20, 33 or 50 per cent shareholder controller of the insurer. The BMA may object to the change unless satisfied that the person is fit and proper to be a controller, the interests of clients of the insurer will not be threatened and minimum criteria will continue to be satisfied by the insurer.
For changes in the control of insurers that are public companies, a post-transaction notification applies.
Commercial insurers must notify the BMA after becoming aware of a change in control meeting the threshold proportions referred to above. Captive insurers need notify the BMA of changes in control upon filing their annual statutory financial statements.
11 Financing of an acquisition
What are the requirements and restrictions regarding financing of the acquisition of an insurance or reinsurance company?
Any financing of an insurer must take the form of equity finance or subordinate debt of a statutorily prescribed type or of a type specifically approved by the BMA.
12 Minority interest
What are the regulatory requirements and restrictions on investors acquiring a minority interest in an insurance or reinsurance company?
The process of approval of controllers is discussed in answer to question 10 above. There are restrictions applicable to foreign ownership of Bermuda incorporated insurers, which are discussed in our answer to 13 below.
13 Foreign ownership
What are the regulatory requirements and restrictions concerning the investment in an insurance or reinsurance company by foreign citizens, companies or governments?
Local companies must be at least 60 per cent owned and controlled by Bermudians.
However, most insurers incorporated under Bermuda law are exempted undertakings, which may be 100 per cent owned and controlled by non-Bermudians.
The issue or registration of the transfer of voting shares in the capital of a company incorporated under Bermuda statute that are not listed on an appointed stock exchange may not take place without the prior approval of the BMA in its capacity as the controller of exchange. Notification post-registration or issuance suffices in relation to shares in public companies.
14 Group supervision and capital requirements
What is the supervisory framework for groups of companies containing an insurer or reinsurer in a holding company system? What are the enterprise risk assessment and reporting requirements for an insurer or reinsurer and its holding company? What holding company or group capital requirements exist in addition to individual legal entity capital requirements for insurers and reinsurers?
The BMA has jurisdiction to determine whether it should be the 'Group Supervisor' of an insurance group a member of which is registered under the 1978 Act, the parent of which is incorporated under Bermuda legislation or where the BMA is satisfied that the group is directed and managed from Bermuda. Where it makes such a determination, the BMA may designate a 'designated insurer' in the group which will henceforth be responsible for appointing a group actuary, ensuring that the group maintains available group capital and surplus equal to or greater than its group minimum margin of solvency and whose board of directors must establish group solvency self-assessment procedures. Group solvency requirements and reporting apply to insurance groups of which the BMA is Group Supervisor.
15 Reinsurance agreements
What are the regulatory requirements with respect to reinsurance agreements between insurance and reinsurance companies domiciled in your jurisdiction?
Save as follows and save as set out elsewhere in our answer to this questionnaire, this is not an area that is regulated in Bermuda.
16 Ceded reinsurance and retention of risk
What requirements and restrictions govern the amount of ceded reinsurance and retention of risk by insurers?
There are no requirements and restrictions beyond the requirement applicable to all insurers that the business of the insurer be conducted in a prudent manner.
What are the collateral requirements for reinsurers in a reinsurance transaction?
There are no prescribed collateral requirements, except in relation to certain special purpose insurers and certain Class 3 insurers whose licence requires that their liabilities are fully collateralised at all times.
18 Credit for reinsurance
What are the regulatory requirements for cedents to obtain credit for reinsurance on their financial statements?
There are no prescribed regulatory requirements, but commercial insurers will need to recognise the counterparty credit risks inherent in their reinsurance recoverables in calculating their ECR.
19 Insolvent and financially troubled companies
What laws govern insolvent or financially troubled insurance and reinsurance companies?
The BMA has a broad range of powers to intervene and take action in the event that an insurer is in distress. The only formal procedures available for the administration of an insolvent insurer are winding up by the Court or a Scheme of Arrangement of the insurer's debt. A liquidator of a company carrying on long-term business is to carry on the long-term business of the insurer, unless the Court orders otherwise, with a view to transferring it to an existing or newly incorporated insurer. In the winding up of an insurer that is unable to pay its debts, the Supreme Court has jurisdiction to reduce the amount of the contracts of the insurer instead of making a winding up order.
20 Claim priority in insolvency
What is the priority of claims (insurance and otherwise) against an insurance or reinsurance company in an insolvency proceeding?
Except as described below, insurance or reinsurance creditors currently enjoy no priority over general unsecured creditors of an insolvent insurer wound up under the Bermuda Companies Act.
The long-term business policyholders of an insolvent insurer are to be paid out of a ring-fenced 'long-term business fund' of the insurer.
The BMA has consulted on reform providing for the priority of certain claims of policyholders over unsecured general creditors in the winding up of an insurer.
What are the licensing requirements for intermediaries representing insurance and reinsurance companies?
The carrying on of the business of an insurance manager, an insurance broker, an insurance agent or an insurance salesman, in or from within Bermuda, is regulated in Bermuda.
An insurance manager, broker, agent or salesman may be a natural person or body corporate. It must meet the minimum criteria for registration, including fitness and propriety of controllers. The fitness and propriety of officer controllers will be assessed by reference to the competence and capability, and the honesty, integrity and reputation of the officer controllers. Intermediaries are required to maintain adequate professional indemnity insurance but are not otherwise subject to any prudential requirements.
The BMA has proposed a draft Insurance Manager Code of Conduct.
INSURANCE CLAIMS AND COVERAGE
22 Third-party actions
Can a third party bring a direct action against an insurer for coverage?
Claimants may proceed directly against liability insurers pursuant to the Third Parties (Rights Against Insurers) Act 1963 in the event of the bankruptcy or winding-up of the insured. In certain circumstances, direct action is permitted against insurers who issue policies insuring ship owners in respect of liability under the Merchant Shipping Act 2002. Insolvency of the insured is not a pre-condition. Under the Motor Car Insurance (Third-Party Risks) Act 1943 claimants may, in certain circumstances, proceed directly against insurers in the event of the bankruptcy or winding-up of the insured. See also question 44.
23 Late notice of claim
Can an insurer deny coverage based on late notice of claim without demonstrating prejudice?
Except in very unusual cases, an insurer may only deny coverage under a valid policy based on late notice of a claim without prejudice if notification is a condition precedent to the liability of the insurer for the claim. It is not necessary for the insurer to establish prejudice to deny coverage for breach of a notification requirement that has the status of a condition precedent.
24 Wrongful denial of claim
Is an insurer subject to extracontractual exposure for wrongful denial of a claim?
Although the position has not been considered in any reported decisions of the Bermuda Supreme Court, a Bermuda court is likely to follow the principle enunciated by the English Court of Appeal in Sprung v Royal Assurance plc  1 Lloyd's Rep IR 111, that a claim for non-payment of insurance is a claim for damages for breach of contract, and that a claim for damages for non-payment of damages is not a claim recognised by law.
25 Defence of claim
What triggers a liability insurer's duty to defend a claim?
Absent an express provision in the policy, an insurer has no duty to defend a claim under a policy governed by Bermuda law. As noted elsewhere in our answers to this questionnaire, policies written on the Bermuda form, while governed by modified New York law, exclude any duty to defend. A policy of liability insurance governed by Bermuda law may provide for an obligation of the insured to cooperate with or cede control of the defence to the insurer.
26 Indemnity policies
For indemnity policies, what triggers the insurer's payment obligations?
For first-party insurance, the insured must have sustained loss, damage or injury within the terms of the policy. For insurance against risks of liability to third parties, the insured must have ascertained its liability and the quantum of its liability by judgment, settlement or award.
27 Incontestability period
Is there an incontestability period beyond which a life insurer cannot contest coverage based on misrepresentation in the application?
With the exception of a misstatement of the age of a person whose life is insured under a policy, non-disclosures and misrepresentations of facts material to the insurance of a person whose life is insured under a policy no longer render the policy voidable after the contract has been in effect for two years during the lifetime of the person.
28 Punitive damages
Are punitive damages insurable?
There is no reason in principle why an insured's risk of liability to pay punitive damages may not be validly insured under a policy governed by Bermuda law.
29 Excess insurer obligations
What is the obligation of an excess insurer to 'drop down and defend', and pay a claim, if the primary insurer is insolvent or its coverage is otherwise unavailable without full exhaustion of primary limits?
A properly drafted clause specifying that the excess is an aggregate excess will 'drop down' and attach without the benefit of any excess upon exhaustion of the aggregate excess. Absent wording to the contrary, attachment will be determined by reference to the underlying loss of the insured, not the ability or inability of the primary insurer to satisfy its liability for the underlying loss under the primary policy in full out of its own assets.
Note that policies written on the Bermuda Form do not as a rule provide for drop-down or a duty to defend. Furthermore, given the high-excess attachment points of most Bermuda insurance business, it is relatively unusual (but by no means unheard of ) for Bermuda insurers to be involved in the defence of third-party claims generally.
30 Self-insurance default
What is an insurer's obligation if the policy provides that the insured has a self-insured retention or deductible and is insolvent and unable to pay it?
For an insurer to be liable under a policy of third-party liability insurance governed by Bermuda law, the insured must ascertain its liability to the third party, and the quantum of that liability, by judgment, settlement or award. Except in a limited range of cases (see below regarding 'pay as paid' clauses), it is irrelevant that the insured may be unable to pay the claim owing to insolvency, provided that the insured has ascertained its liability, and the amount of it, by one of the aforementioned methods.
31 Claim priority
What is the order of priority for payment when there are multiple claims under the same policy?
This is not an area that has been examined in any reported decisions of the Bermuda Supreme Court, but it is likely that the Supreme Court would follow the English authorities which hold that policy limits are eroded in chronological order of the ascertainment of loss (third-party liability) or of underlying loss, damage or injury (first party).
32 Allocation of payment
How are payments allocated among multiple policies triggered by the same claim?
There is no reported Bermuda case law on this point. Although it is difficult to generalise, it is likely that divisible damage or injury occurring over time must be apportioned across all policies insuring periods during which damage or injury occurred, weighted where necessary if damage or injury has not occurred on a straight-line basis over time. Bermuda courts have not yet had to wrestle with the question of the allocation of indivisible losses, such as asbestos-related mesothelioma, where the loss triggers multiple policies insuring the policyholder against liability arising from exposure to asbestos.
33 Disgorgement or restitution
Are disgorgement or restitution claims insurable losses?
A liability to turn over property that a person receives or holds in breach of trust is unlikely to trigger a claim for indemnity under a policy of insurance, if for no other reason than there will be no cost to the insured in discharging its liability by turning over trust property that does not belong to the insured. There is no reason in principle why a liability to provide restitution should not be insurable. However, there is no reported Bermuda case law on this subject.
34 Definition of occurrence
How do courts determine whether a single event resulting in multiple injuries or claims constitutes more than one occurrence under an insurance policy?
There are no reported Bermuda decisions on point. It is likely that the Bermuda courts would consider the numerous decisions of the English High Court and Court of Appeal, which have required that an event must display the 'four unities' of cause, locality, time and intentions of the persons responsible. It is also likely that the Bermuda courts will require a causative link between the event and the injuries or claims, although this requirement may be diluted by agreement of the parties.
Policies written on the 'Bermuda Form' have a technical, bifurcated definition of 'occurrence' by reference to an event or continuous, intermittent or repeated exposure to conditions (non-products), or to actual or alleged personal injury or property damage arising from the insured's products (products). Both specify requirements as to the timing of the relevant event or conditions (non-products) or of the relevant personal injury or property damage (products), as the case may be.
35 Rescission based on misstatements
Under what circumstances can misstatements in the application be the basis for rescission?
A contract of insurance is a contract of utmost good faith. One of its legal incidents is a duty upon the insured, prior to conclusion of the policy, to disclose all facts and circumstances material to the risk which are known or ought in the ordinary course of business to be known by or communicated to the insured. The duty of utmost good faith is not an implied term. In the event of breach of the insured's duty of utmost good faith, the insurer is (absent waiver) entitled to avoid the policy if the insurer can establish that the breach induced the insurer. Where the insurer seeks to avoid, it must tender return of premium (although it is arguable that this is not the case in the event that the misrepresentation or non-disclosure is fraudulent in nature). In addition, it is conceivable that an insurer may be able to seek damages in lieu of rescission for negligent misrepresentation under the Law Reform (Misrepresentation and Frustrated Contracts Act) 1977. Where the misrepresentation is fraudulent in nature, the insurer may also have a claim for damages in the tort of deceit.
REINSURANCE DISPUTES AND ARBITRATION
36 Reinsurance disputes
Are formal reinsurance disputes common, or do insurers and reinsurers tend to prefer business solutions for their disputes without formal proceedings?
Formal reinsurance disputes are very rare in Bermuda. Insurers and reinsurers prefer business solutions to formal proceedings and generally prefer arbitration to litigation.
37 Common dispute issues
What are the most common issues that arise in reinsurance disputes?
The more commonly arising issues relate to aggregation, allocation to the correct period, causation (particularly issues where there is more than one candidate cause of the loss), and timely notification.
38 Arbitration awards
Do reinsurance arbitration awards typically include the reasoning for the decision?
Under the Bermuda International Conciliation and Arbitration Act 1993 (1993 Act), the award must be in writing and signed by the arbitrators and the reasons upon which it is based must be given, unless the parties have agreed that no reasons are to be given.
39 Power of arbitrators
What powers do reinsurance arbitrators have over non-parties to the arbitration agreement?
The directions or awards of arbitrators appointed under the 1993 Act are binding only on the parties to the arbitration agreement and their successors. Strangers to the arbitration agreement cannot be made party to arbitration proceedings.
40 Appeal of arbitration awards
Can parties to reinsurance arbitrations seek to vacate, modify or confirm arbitration awards through the judicial system? What level of deference does the judiciary give to arbitral awards?
An award is final and not subject to any appeal on the merits. There are very limited grounds to challenge an award under the 1993 Act, including invalidity and conflict with public policy.
REINSURANCE PRINCIPLES AND PRACTICES
41 Obligation to follow cedent
Does a reinsurer have an obligation to follow its cedent's underwriting fortunes and claims payments or settlements in the absence of an express contractual provision? Where such an obligation exists, what is the scope of the obligation, and what defences are available to a reinsurer?
While there is no reported Bermuda case law on point (much of the decisions on the issue having been determined in confidential arbitration), where the reinsurance agreement lacks a follow settlements or loss settlements binding clause, it is likely that the cedant must prove its inwards liability and the amount of its liability as a matter of law and fact as a condition precedent to establishing its cause of action for breach of the reinsurance contract, notwithstanding that the reinsured may have reached a reasonable settlement of its inwards liability and notwithstanding that the underlying insured may have obtained judgment against the insurer.
42 Good faith
Is a duty of utmost good faith implied in reinsurance agreements? If so, please describe that duty in comparison to the duty of good faith applicable to other commercial agreements.
Contracts of reinsurance are regarded as types of contract of insurance. As noted in our answer to question 35, one of the legal incidents of a contract of insurance is a mutual duty of utmost good faith.
43 Facultative reinsurance and treaty reinsurance
Is there a different set of laws for facultative reinsurance and treaty reinsurance?
There is not a set of different laws for facultative reinsurance and treaty reinsurance. The respective obligations of reinsured and reinsurer will be a matter for agreement of the parties.
44 Third-party action
Can a policyholder or non-signatory to a reinsurance agreement bring a direct action against a reinsurer for coverage?
A policyholder or other third party may only enforce terms of a reinsurance contract against a reinsurer if they are a party to the reinsurance contract or if they are a third party entitled to enforce the term in their own right pursuant to the Contracts (Rights of Third Parties) Act 2016.
The assignee pursuant to an absolute assignment by writing under the hand of the insurer, and of which express notice in writing has been given to the reinsurer of a matured right in a reinsurance contract that does not by its terms prohibit assignment, may institute proceedings in respect of the right in its own name.
'Cut-through' provisions (purporting to entitle an insured to require a reinsurer, in the event of an insolvency event affecting the insurer, to discharge the reinsurer's obligations by payment direct to the insured) are unusual in Bermuda and potentially void as contrary to the anti-deprivation principle.
45 Insolvent insurer
What is the obligation of a reinsurer to pay a policyholder's claim where the insurer is insolvent and cannot pay?
The answer to this question will depend on the governing law of the reinsurance contract and on the insolvency principles applicable to any procedure affecting the insolvent insurer or its assets. However, for a reinsurer to be liable under a reinsurance contract governed by Bermuda law, the insurer must ascertain its loss and the quantum of that loss by judgment, settlement or award. Except in a limited range of cases (see below regarding 'pay as paid' clauses), it is irrelevant that the insurer may be unable to pay a claim under a policy reinsured by the reinsurer, provided that the insurer has ascertained its loss by one of the aforementioned methods. Accordingly, subject to unusual language in the reinsurance agreement, it will not normally be possible for the insurer, or insolvency officer acting on its behalf, to 'accelerate' the liability of the reinsurer for incurred but not reported losses by reaching an inwards commutation of a policy issued by the insurer.
Some contracts of reinsurance contain 'pay as paid' clauses, which have in some English authorities been interpreted as requiring an underlying payment in full as a condition precedent to the liability of the reinsurer. However, these cases are limited to P&I club membership rules, and it is questionable how likely it is that a Bermuda court or tribunal may follow them in all contexts.
46 Notice and information
What type of notice and information must a cedent typically provide its reinsurer with respect to an underlying claim? If the cedent fails to provide timely or sufficient notice, what remedies are available to a reinsurer and how does the language of a reinsurance contract affect the availability of such remedies?
These will be determined by the treaty or facultative reinsurance wording. Generally the cedent is required to report paid balances and case reserves on a monthly or quarterly basis (in a treaty) or to report claims or losses likely to implicate the reinsurance within a reasonable time (usually a prescribed absolute period), and to furnish the reinsurer with all further information reasonably required. Much will depend on the extent to which the reinsurer is minded to involve itself in the claims administration process. Under Bermuda law, a common interest subsists between a cedent and its reinsurer which protects the privileged status of communications and other documents regarding an underlying loss to which the cedent and reinsurer are both potentially exposed.
47 Allocation of underlying claim payments or settlements
Where an underlying loss or claim provides for payment under multiple underlying reinsured policies, how does the reinsured allocate its claims or settlement payments among those policies? Do the reinsured's allocations to the underlying policies have to be mirrored in its allocations to the applicable reinsurance agreements?
Where a loss implicates multiple policies, only one of which is reinsured, typically allocation at the reinsurance level must mirror allocation at the underlying policy level. There is an argument that, if the entire loss is allocated to only one of several implicated policies, then any reinsurer of that policy may, on paying its share of the loss, be subrogated to any rights of the insurer to seek contribution from the insurers subscribing the other policies.
What type of review does the governing law afford reinsurers with respect to a cedent's claims handling, and settlement and allocation decisions?
Bermuda courts will uphold and give full effect to a valid claims control clause, claims cooperation clause or inspection clause. What rights the reinsurer has pursuant to such clauses will depend upon the drafting of the agreement. However, breach of a claims control clause, claims cooperation clause or inspection clause that does not specifically require compliance as a condition precedent to the liability of the reinsurer will seldom present the reinsurer with a defence to a claim for payment of balances under the reinsurance contract.
49 Reimbursement of commutation payments
What type of obligation does a reinsurer have to reimburse a cedent for commutation payments made to the cedent's policyholders? Must a reinsurer indemnify its cedent for 'incurred but not reported' claims?
There is little reported Bermuda case law on this point. In a number of cases concerning the potential for indemnity clauses in shareholders agreements used in rent-a-captive structures to respond to commutation payments made by the captive reinsurer in whose share capital the indemnitor held preferred shares, the Supreme Court has held that the indemnitors were obliged to indemnify the commutation payments, but in at least one of these cases explicitly distinguished the indemnity clauses from reinsurance contracts, holding that reinsurance authorities were not relevant.
It is more likely than not that a Bermuda court would hold that a payment for a release in respect of prospective liabilities under an insurance or reinsurance contract would not be considered a loss settlement for the purposes of a typical loss settlements provision.
50 Extracontractual obligations (ECOs)
What is the obligation of a reinsurer to reimburse a cedent for ECOs?
A typical contract of reinsurance will only extend to losses within the terms and conditions of the reinsured policy, or which are made in the ordinary course of business and which the reinsurer is unable to show are not proper and business-like. This would appear to exclude extracontractual obligations. On the other hand, a large proportion of treaty business written in Bermuda includes express coverage for extracontractual obligations (and for excess limits liability).
This article was first published in Getting the Deal Through: Insurance & Reinsurance 2016.
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.