The Reinsurance Recovery Dispute
A regional insurer writes a book of commercial property business. It buys a quota share treaty ceding 40% of every risk, and a per-risk excess of loss treaty attaching at £2m with a £10m limit, in excess of a £2m retention. In November a single fire at a large warehouse causes a gross loss of £9m. The insurer had failed to disclose to the excess of loss reinsurer that it had bound a £6m line on this risk outside its underwriting authority, and that the risk had been flagged by its own surveyor as having inadequate sprinkler protection. The quota share reinsurer was told about the surveyor's report but not about the authority breach. The insurer now seeks recovery from both treaties.
1. Advise the insurer on its recoveries from the quota share and the excess of loss treaty, applying reinsurance principles.
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Quota share. The quota share reinsurer was told about the surveyor's report but not about the authority breach. Non-disclosure of the authority breach is material: a reinsurer would want to know that the cedant had bound a line outside its authority, because it signals control failure and potential regulatory issues. The quota share reinsurer may therefore avoid or reduce its liability for this risk under the Insurance Act 2015 remedies (proportionate reduction for negligent non-disclosure). The surveyor's report was disclosed, so that ground is weaker for the quota share.
Excess of loss. The excess of loss reinsurer was told neither about the authority breach nor the sprinkler report. Both are material to the excess of loss underwriter, who is exposed to the top of the loss. The reinsurer has strong grounds to avoid or reduce. Because the non-disclosure appears negligent rather than deliberate, the court would apply the proportionate remedy: it would ask what the reinsurer would have done had it known - likely declined the risk or imposed terms. The recovery may be reduced substantially.
Order of recovery. The quota share responds first to 40% of the gross loss (£3.6m). The remaining 60% (£5.4m) is retained by the insurer and presented to the excess of loss treaty, which attaches at £2m and covers up to £10m, so the excess layer bears £3.4m (from £2m to £5.4m) if the treaty responds in full.
Conclusion. Both recoveries are at risk. The insurer should notify both reinsurers, investigate the authority breach, and prepare for proportionate reduction arguments.
2. What does this case reveal about the cedant's obligations of utmost good faith and the controls expected of it?
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Reinsurance is a contract of utmost good faith, and the cedant owes the reinsurer a duty of fair presentation. The duty is not satisfied by dumping data; it requires disclosure of material circumstances in a manner that a prudent underwriter would want.
Material circumstances here:
- The line was bound outside the cedant's underwriting authority. This is a control failure and a governance red flag.
- The surveyor had flagged inadequate sprinkler protection. This is a known physical hazard.
- The cedant knew both facts before the loss and before the treaty was finalised.
Controls expected:
- Underwriting authority. Clear delegated limits, system controls that block binding above authority, and exception reporting.
- Survey follow-up. A surveyor's recommendation must be tracked to completion, with evidence of remediation or an agreed risk improvement schedule.
- Reinsurance disclosure. A formal process for passing material risk information to reinsurers, including survey reports and any authority exceptions.
- File discipline. The reinsurance file should show what was disclosed and when.
Consequences. Beyond the recovery dispute, the cedant faces regulatory scrutiny for the authority breach and potential errors and omissions exposure. The lesson is that the reinsurance relationship depends on the cedant's internal controls being sound, because the reinsurer is relying on the cedant to select and manage the risks it cedes.