The Reinsurer's Late Notice
A regional insurer writes commercial motor business and protects it with a facultative reinsurance certificate covering a single large fleet account. The certificate contains a claims-cooperation clause requiring the reinsurer to be notified 'as soon as practicable' of any claim likely to exceed £250,000, and a follow-the-settlements clause. In September the cedant settled a £1.8m bodily injury claim arising from a multi-vehicle motorway collision. It notified the reinsurer only in November, after settlement, because the claims handler believed the reinsurer 'would not want to be troubled' until the quantum was agreed. The reinsurer has now received the file and is refusing to indemnify, citing late notice and arguing it lost the opportunity to investigate liability and quantum. The cedant says the follow-the-settlements clause obliges the reinsurer to pay whatever it settled.
1. Advise the cedant on whether late notice defeats the reinsurance recovery, and whether follow-the-settlements rescues it.
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Two clauses are in tension, and the outcome depends on their precise wording and on proof of prejudice.
Late notice. A notice clause is a condition. Whether breach defeats recovery depends on whether the clause is a condition precedent to liability and whether the reinsurer suffered prejudice. Here the reinsurer says it lost the chance to investigate. That is a real prejudice argument: a £1.8m bodily injury claim settled without the reinsurer's input may have been settled at a figure the reinsurer would have contested. The cedant's reason - not wanting to 'trouble' the reinsurer - is not a legal justification; the clause required notice 'as soon as practicable', and a claim likely to exceed £250,000 was identifiable well before settlement.
Follow-the-settlements. This clause obliges the reinsurer to follow the cedant's good-faith settlement of a covered claim. But it does not override a notice condition, and it does not protect a settlement reached in breach of a cooperation clause or in bad faith. Many follow-the-settlements clauses are expressly subject to the claims-cooperation provisions. The cedant cannot use follow-the-settlements as a cure for its own procedural default.
Practical position. The cedant's best argument is that the reinsurer suffered no material prejudice - the liability was clear from the police report and the quantum was supported by medical evidence. The cedant should assemble that evidence and offer the reinsurer the opportunity to review. The reinsurer's best argument is that it lost the ability to contest quantum. A negotiated outcome - partial recovery, or recovery subject to the reinsurer's review - is more likely than a clean win for either side.
2. What internal controls should the cedant have had, and what should it do now to protect future recoveries?
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What went wrong. The failure was a control failure, not a legal one. The handler applied a personal judgement ('don't trouble the reinsurer') in place of a documented notification trigger. There was no second pair of eyes on a claim that plainly exceeded the £250,000 threshold.
Controls that should have existed.
- A system flag at the notification threshold, so that any claim reserve crossing £250,000 automatically generates a reinsurance notification task.
- A written notification protocol specifying who notifies, in what form, and within what period.
- A requirement that no settlement above the threshold be concluded without reinsurer notification and, where the clause requires it, consent.
- Periodic reinsurance recoverable reconciliations, so that outstanding recoveries are visible to finance and to the reinsurance team.
- Training for claims handlers on the effect of follow-the-settlements and cooperation clauses.
What to do now. Notify the reinsurer formally, provide the full file, invite its review, and document the cedant's good-faith assessment of liability and quantum. Preserve the recoverable in the accounts but flag it as disputed. Consider whether the cedant's own errors-and-omissions cover responds if the recovery fails. Finally, review all open claims above the threshold for similar notification failures before the reinsurer's audit finds them.