It should be appreciated by the students that the business of reinsurance is very much within the four walls of the business of insurance, and
most of the legal considerations, as applicable to the business of insurance will also equally hold good in so far as reinsurance business is concerned.
The students should also appreciate that it is not possible to deal comprehensively the vast legal matters surrounding the business of reinsurance in a few pages.
Nor it is the intention either. Only those very vital matters would be indicated here which a student of insurance, particularly at this stage, should ordinarily know.
The important legal considerations are summarized below in stratum.
- As a general rule, reinsurance is a contract between the direct insurer and the reinsurer to which the original assured is not a party and which does not obligate the reinsurer to the assured. (Baltica Insurance Co. V. Carr, 330 ).If the reinsurers fail to meet their liability, the direct insurer would still be liable for the whole loss to the policy holder. Policy holder’s redress lies with the insurer and not the reinsurer.
- Contracts of reinsurance require Utmost Good Faith on the part of the insurer.Generally,
the same rules, with reference to misrepresentation and non-disclosure, that apply in connection with ordinary insurance contracts apply in cases of reinsurance contracts.
Whereas an assured may not be under an obligation to describe his own bad character to his insurer, yet the insurer seeking reinsurance may be under the duty to disclose what he knows about the assured. ( lonides V. Pender (1874) L. R. 9 0. B. 531).
- The contract of reinsurance is equally subjected to the requirement of Insurable Interest. It is a legal financial.
- interest which entitles the insured or the insurer to insure or reinsure.Insurers have got insurable interest against the policy they have issued because of the possible financial involvement arising out of a loss, and this justifies existence of insurable interest thereby validating reinsurance contracts.
- Reinsurance is an agreement to indemnify the direct insurer, partially or altogether, against a risk assumed by him in a policy issued to a third party. (Friend Bros. V. Seaboard Surety Co. 56N,E. ALR 962).Reinsurance is a contract, which involves the principle of indemnification (Union Central Life Ins. Co. V. Lowe, 182 N.E. 611).
- The reinsurer is obligated to the ceding company. The direct company, known as the reinsured, by its contract with the reinsurers, obtains power to collect from the reinsurers because of the loss suffered by the original insured.
- From the business relationship established between the reinsurer and the reinsured there may arise a contract of reinsurance.The risk assumed in reinsurance must be determined by examining the contract of reinsurance.
It cannot be taken for granted that the risk covered by the reinsurance contract is the same as that covered by the original Policy written by the direct insurer.
- Reinsurance does not mean double insurance.Double insurance exists where there are two policies in force covering the same interest of the same insured on hazards that are identically same and involving the same subject- matter.
In reinsurance different interest and different party is involved. Whereas, in double insurance the original insured has got direct contractual relationship with the insurer, in reinsurance contract he holds no contractual relationship.
- Reinsurance does not mean coinsurance for the same reason as explained under double insurance.Whereas,
in co¬insurance the insured is contractually linked up with the various co-insurers directly to the extent of respective shares assumed by them, in reinsurance he (insured) is not a party at all.
- Usually reinsurers are liable as per liability of the original insurer. Therefore, when the original insurers on different considerations, make ex-gratia payments without admitting liability under the policy of insurance, they cannot claim recovery from their reinsurers.
- When after making payment of a claim the insurers make any recovery from the liable third party as per policy terms and conditions, the reinsurers become entitled to such recovery proportionately.This means that the principle of subrogation applies. The insurer cannot make profit by recovering from all the sources.
As reinsurance contracts are contracts of indemnity, the principle of contribution also equally applies to reinsurance contracts. By effecting numbers of reinsurance contracts, the ceding company cannot recover from each reinsurer full amount of loss independently.