1.          The rationale for notice

C1        The duty of utmost good faith for a reinsured includes the duty to provide fair warning to the reinsurer of likely future demands for payment due to the reinsured’s claims responsibility. This enables the reinsurer to make finance and reserving plans and to consider how closely to monitor the situation, consistent with any claims control clause in the contract of reinsurance or Article 2.4.2.

2.          The triggering of the notice obligation

C2        Notice determinations should be made on the basis of the reinsured’s objectively reasonable analysis of its claims activity in light of the nature of the affected contract of reinsurance. A reinsured is not required to give notice of every claim for which large damages are alleged or every category of claims that poses only a remote risk of class action or mass tort status. The reinsured is, however, required to provide notice where the reinsured knows there is a substantial probability that it will be seeking reinsurance payments in connection with a particular policy, treaty, claim, or risk.

Illustrations

I1.         Reinsured A holds a facultative certificate with Reinsurer B which provides for coverage on an excess of loss basis after Reinsured A’s claims payments exceed USD 5 million regarding an identified group of general liability policies. One of Reinsured A’s policyholders supplies component parts for a medical device that has recently been called defective in the media. Seven lawsuits have been filed, with each of the plaintiffs claiming the medical device was defective and has caused serious injury. The policyholder’s corporate counsel advises Reinsured A that this is probably “just the tip of the iceberg.” Reinsured A must give prompt notice of the situation to Reinsurer B. These developments that post-date contract formation suggest a much higher risk exposure and likelihood of payments by both Reinsured A and Reinsurer B than was originally anticipated.

I2.         Same facts as in the previous Illustration, except that there is only one lawsuit to date that was filed in a jurisdiction known for its swift disposition of cases. Corporate counsel and policyholder defense counsel (provided for by Reinsured A) believe that other potential plaintiffs are refraining from suit until they see the outcome of the one case. Defense counsel has investigated and concluded that media articles were overwrought and believes the case is defensible on both the question of product defect and on the question of causality and damages. The plaintiff has a history of significant medical problems. Reinsured A determines that it need not provide notice of the lawsuit to Reinsurer B. Fast-track trial ensues and results in a defense verdict, vindicating Reinsured A’s decision that notice was unnecessary. Reinsured A has acted in compliance with its duty to notice claims under Article 2.4.1.

I3.         Same facts as in the previous Illustration, but the fast-track trial results in a large plaintiff’s verdict. Despite this, Reinsured A’s decision to refrain from notice during the pendency of the trial appears reasonable under the circumstances. Reinsured A may, however, be required to notify Reinsurer B of the large verdict and its implications regarding risk of additional liability of this type and potential remedies.

I4.         Same facts as in the previous Illustration, but in addition, as a reaction to the first plaintiff’s large verdict, two dozen new lawsuits are filed against Reinsured A’s policyholder. Reinsured A now has a duty to notify Reinsurer B. Even if some or all of these new lawsuits result in defense verdicts, the new lawsuits reflect a wave of such claims that increases Reinsurer B’s exposure.