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Symposium 2016

Panel Explores Right to Associate, Claims Cooperation and Claims Control Clauses

by ~ Rachel M. Davison (Email) (Web Site)

Panelists Michael A. Franz (Munich Re America), John T. Harding (Morrison Mahoney LLP), Susan Hartnett (Sugarman, Rogers, Barshak & Cohen, P.C.) and Joseph S. Sano (Prince Lobel Tye LLP) led an informative discussion about the right to associate, claims cooperation, and claims control clauses that appear in nearly every facultative reinsurance contract and many treaties, but are infrequently invoked and rarely the subject of litigation. While many in the audience confirmed that such rights are infrequently exercised, because these types of clauses can play a meaningful role in the handling of reinsurance claims, parties should not only familiarize themselves with the different wordings in the contracts and understand the key differences in these clauses, but should also consider the potential benefits and risks of including such clauses and exercising the rights they confer.

The rights, the obligations, and the degree of control conferred by these clauses are on a continuum, with the more typical “right to associate at one end of the spectrum, and “control clauses at the other. The specific wording employed in the reinsurance contract determines how involved the reinsurer may become in the handling of underlying claims.

“Association clauses typically grant the reinsurer the right and opportunity to “associate in the handling and defense of underlying claims. Although the contract language does not further define how this right should be exercised, in practice, this clause permits the reinsurer to consult with and advise the reinsured in its handling of the claim without imposing any affirmative obligation on the reinsurer to investigate or defend the underlying claim. While the level of association varies from relationship to relationship, the right generally includes more than the contractual right of inspection and claims review, and allows reinsurers the right to have and timely express an opinion about the on-going handling of the underlying claim. But, as one panelist observed, there might not be anyone listening.

“Claims cooperation clauses typically grant the reinsurer an increased measure of control by granting it the right to cooperate with the insurer in the settlement of underlying claims, and not just the defense, often by prohibiting settlement without the consent of the reinsurer. As the panel explained, these clauses are more common in London-based reinsurance contracts.

Claims control clauses, on the other hand, tend to permit the reinsurer to participate directly in negotiations, adjustment and settlement of underlying claims. In general, these clauses are more common when the ceding company retains little or no risk. These clauses cede the most control to a reinsurer and may impose an affirmative obligation on the reinsurer to exercise actual control over all or a portion of the claims handling, including the obligation to investigate, adjust and resolve claims.

The panel discussed some of the practical concerns that might influence the decision to exercise these contractual rights and how these rights would actually be exercised in practice, including the importance of ongoing and clear communications between the reinsurer and the reinsured. Because these clauses do not describe how they can or should be exercised, depending on the relationship between the parties, documenting the exercise in writing may be beneficial for either or both parties.

Often, alleged prejudice resulting from the reinsurer’s inability to exercise its right of association, cooperation, or control is referenced in disputes involving late notice from the reinsured. The courts in most jurisdictions that have addressed the effect of late notice on a reinsurer’s association rights have, however, concluded that the potential impairment of association rights, alone, is not evidence of prejudice sufficient to vitiate the reinsurers indemnity obligation unless notice was expressly a “condition precedent to the reinsurer’s liability.

Other practical considerations and issues discussed included whether the exercise of associational rights might create exposure to direct claims by policyholders, or might impact a reinsurer’s or cedent’s position in a later reinsurance dispute, and how these claims and rights might affect questions of privilege with respect to information shared by the parties as the result of the exercise of association rights. One solution offered was the use of a separate claim-specific association agreement that addresses circumstances which should be considered, but are frequently not addressed in typical association clauses such as the allocation of risks associated with direct claims for extra-contractual liability,, and the scope of disclosure of information during the association, including privileged information. A sample agreement is available from the 2011 Symposium section of MReBA’s website.

Overall, as the panel members explained, right of association, claims cooperation, and claims control clauses can provide advantages to both the reinsurer and the reinsured by opening up channels of communication. While ceding companies may be hesitant about sharing control over particular claims, the active exercise of one of these clauses by a reinsurer might limit its interest in or ability to second-guess the actions of the reinsured. In addition, these clauses provide an opportunity for the reinsurer to improve the reinsurer-reinsured relationship because they allow the parties to learn more about each other and the underlying claims, with the goal of achieving a more favorable outcome for all parties.

Rachel Davison can be reached at rdavison@morrisonmahoney.com.
 2011 Morrison Mahoney LLP. All rights reserved. The views and opinions attributed to speakers at the Symposium do not necessarily reflect the views of their respective companies, law firms, or clients, or any of their members, affiliates, shareholders, or managers.We are proud of bringing you the very best that the fashion world has to offer miu miu bags uk,replica breitling watches,replica chopard watches and gucci replica watches at very affordable prices without compromising on quality and style.

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