As you know an insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. Through insurance we analyse, evaluate, estimate and transfer outcomes of risk/perils to the insurance company. The insurance company generally in lieu of small payment called “Premium” issue an insurance policy (insurance contract) by insuring specified risks/perils. Please note that insurance company indemnified us in case of financial loss on happening of those insured risks/perils.
An entity which provides insurance is known as an insurer, an insurance company, an insurance carrier or an underwriter.
The insurance companies do also secure themselves against large claim to sustain and make profit. The Re-insurance concept is insurance of insurance companies. In this process the original insurance company share ( subject to its retention) a large portion of stake to other insurance company or they contract with another insurance company to underwrite its proposal in case of large sum assured.
In this case if insurers finds that they have entered into a contract of insurance which is an expensive proposition for them or if they wish to minimise the chances of any possible loss , without ,at the same time giving up the contract, resort to have a devise called reinsurance.
Please note that “ Re-insurance Contract” is between the re-insured and the re-insurer, the assured has nothin to do with it, except so far as it guarantees him against default by his own re-insurance. He cannot sue on it. But the re-insurer’s liability would be discharged by the payment to the assured of the amount at the time of loss. The Original Contract of Insurance and Re-insurance Contracts are two distinct contracts and the re-assured remains solely liable on the original insurance and alone has any claim against the re-insurer.
A policy of re-insurance stipulates for payment by the re-insurer “ as may be paid” by the re-insured. This means that the liability of the re-insurer is coextensive with the liability of re-insurers. When the loss or the event insured against occurs, the liability of the re-insurer under the policy of re-insurance comes into existence but the re-insurer shall have to be satisfied by evidence or admission before they may called upon to indemnify the reinsured. It means an re-insurer have all rights to ask evidences and asked by the insurer against a claim from the insured to verify genuineness of the claim.
The liability of re-insurer becomes fixed as soon as the amount payable under original policy is admitted and ascertained. Ex-gratia payments do not bind re-insurer and note that under a policy of re-insurance ,if insurer pay any ex-gratia payment to the original insured ,then re-insurer is not liable to pay his share in the Ex-gratia payment.
Please Note That- in case of an re-insurance contract , the insurer is bound to prove the loss against the re-insurer in th same manner as the original insurer must have proved against him irrespective of the fact whether the insurer has paid the insured or not. [Re,London county commercial Re-insurance Office(1922), 2 Ch 67].
STATUS OF ORIGINAL CONTRACT & CONTRACT OF RE-INSURANCE
The Re-insurance is subject to the clauses and conditions in the original policy, and is also entitled to any benefits which the original insurance policy is entitled to.[Joyce Vs. Realm Insurance Co. (1872)41 LJQB, 372, in re, Eddystone etc.,(1892) 2Ch423].
The Clauses of the Original Insurance Policy ( between insurer and the original insured i.e. primary insurance contract) are deemed to be incorporated in the policy of re-insurance unless they are inconsistent with it. A policy of re-insurance is subject to same terms and conditions as original insurance policy. A re-insurer can raise all defence as available to re-insured in the original insurance policy.
LET’S CONSIDER -where a contract of fire insurance contains a condition providing that the claim shall lapse if a suit be not commenced within three months of rejection of the claim and a contract of re-insurance effected by the insurers, this condition will not apply to the contract of re-insurance.
Please Note That –
1. If an original contract is altered without the consent or knowledge of the re-insurers, the re-insurers will be discharged.
2. The re-insurance ends with the end of original contract of insurance.
3. As discussed above re-insurance contract and original contract are coextensive , if original contract lapses ,then re-insurance contract also comes to an end.
4. We know that a policy once lapsed may be renewed . In such cases re-insurance does not become detached to the renewed policy unless express provision to that effect.
PLEASE NOTE THAT DUTY OF GOOD FAITH WILL ON RE-INSURED IN A RE-INSURANCE CONTRACT.
The re-insured at the time of re-insurance contract is in position of an assured and the duty of good faith is cast upon him. He (re-insured) bound to communicate the re-insurer all the facts within his knowledge material to risk. Consequently if there is any non-disclosure or concealment , the contract of re-insurance is void.
Please Note That-
1. if a re-insurance policy is issued with the condition: “ subject without notice to the same clauses and conditions as the original policy” amounts to waiver of the re-insurer’s right of disclosure.[ Property Insurance Co. vs. National Protector Insurance Co., (1913) 108 LT 04].
2. The insurer is bound to inform the re-insurer not only the all facts material to the risk which come within his knowledge at the time of the principal contract , but also such facts as he become possessed of after the execution of such contract.
3. Are-insured is himself as he assured who takes upon himself the duty not only before , but after the contract comes into force to act with the greatest faith.
4. In a contract of re-insurance the statements and representations made by the absurd in his original insurance contract /policy may be construed as forming the basis of re-insurance policy with the result the re-insurer would be entitled to repudiate liability in event of any statement of the assumed turning out to be untrue at the date of original policy.
5. In Foster Vs. Mentor Life Assurance Company (1854) 23 LJQB 145- it was held that the statements and representations I the original insurance were held to have been adopted in the re-insurance policy so as to warrant their accuracy at the date of the issue of re-insurance policy. The Original Policy may be referred to in the re-insurance policy merely with the object of furnishing information to the re-insurer as to the answer given by the insured in the application.
6. So it is duty of re-insured to inform the re-insurer the case of any change in terms and conditions of the original insurance policy/any endorsement held or any information comes to his knowledge during tenure of the original insurance policy on the basis of which original insurance policy may be terminated or become void.
PLEASE NOTE THAT; if a person makes a representation calculated to induce another to assume a particular liability and circumstances are afterwards ( before the liability is assumed) altered to the knowledge of the person making the representation that the alteration might affect the course of conduct of the person to whom representation was made , it is the imperative duty of the person who made the representation to communicate the same to the person to whom he had made the alterations of the circumstances and a court of equity will not hold a person to whom the representation is made to be bound by any contract entered into on the faith thereof unless communication has been made.
LET’S CONSIDER AN EXAMPLE an insurance company A Ltd., has issued a life insurance policy of Sum Assured Rs. 5.00 Lakhs and he discussed with company B Ltd., for re-insurance of Rs. 2.00 Lakhs. Another company C Ltd., is also interested in reinsurance and A Ltd., made a contract with C Ltd., and assume risk of Rs. 3.00 lakhs. In this case A Ltd., does not assume any risk and the arrangement with C Ltd., has not been informed to B Ltd., it was held that B Ltd., is not liable to pay claim of Rs. 2.00 Lakhs in case of loss.
It is clear from above that misrepresentation by the re-insured will avoid the policy. But representation as to the nature of risk will not help the re-insurer who has not formed his own judgement of the nature of risk.
The re-insurer are entitled to be surrogates to all the rights of the original insurers including the right of the assured to which the original insurers are subrogated.
CONCLUSION: re-insurance is one the important instrument of risk financing and risk sharing. An insurance at the time of underwriting or before underwriting an insurance policy access his financial position, reserves and may other things to make a decision that to what extent risk he can retain and what amount of business he can re-insure. The insurer enters into a re-insurance contract with the re-insurance companies to cede excess of business than his retention limit to the re-insurance company. The reinsured and re-insurer enters into contract of re-insurance only after the re-insured entered into contract with the assured. Since the Original Insurance Contract becomes a part of re-insurance contract. All terms and conditions of Original Contract will be incorporated into Re-Insurance Contract. It will be noted that the reinsured ( ceding company) stands in the same footing before re-insurer as an assured stands before an insurance company. The condition of utmost good faith and disclosures are applied here also. An assured has no right against the re-insurance company and he cannot sue or claim against the re-insurance company.
DISCLAIMER the article produced here is only for information and knowledge of readers. The views expressed here are the personal views of the author and same not to be considered as professional advice. The readers are advised to consult with insurance professional for more clarity and understanding.