1. The term “loss”
C1 The notion of the “losses occurring” allocation basis is explained in Article 4.2. As a part of the term “losses occurring”, the word “loss” refers to the coverage obligation of the reinsured, i.e. to the reinsured’s contractual obligation to bear the financial consequences of the materialization of a peril insured against under the underlying policy, the reinsured relationship (cf. Comment 10). In contrast, in the rules on loss aggregation, the word “loss” is used to denote the monetary damage incurred by the primary insured (see Comment 11 to Article 5.1). Despite this discrepancy, the PRICL retains the term “losses occurring”, as it has a settled meaning in the reinsurance industry, having been employed by industry participants for a considerable period of time.
C2 It is immaterial whether the reinsured relationship provides for indemnification against loss or damage suffered by the policyholder or another person (indemnity insurance, see Article 1:201(3) PEICL) or for payment of a contractually pre-determined fixed sum on the occurrence of an insured event defined in the policy (insurance of fixed sums, cf. Article 1:201(4) PEICL).
2. Reinsurance allocation at a glance
C3 Together with reinsurance period clauses (see Article 7.1), allocation clauses define the temporal scope of (re-)insurance coverage. Allocation clauses play a decisive role in identifying, among multiple consecutive (re-)insurance contracts, the contract under which it is to be assessed whether and in what amount the (re-)insurer is obligated to make a payment in connection with a particular occurrence (cf. Comment 30).
C4 Where a contract of reinsurance provides for an allocation on a “losses occurring” basis, the loss incurred by the reinsured is to be allocated to that contract if it arises during its reinsurance period. The loss incurred by the reinsured corresponds to the reinsured’s obligation to bear the financial consequences of a loss incurred by its insured (coverage obligation, see Comment 10). It can thus be said that the allocation under the contract of reinsurance is effectively determined by the allocation mechanism applicable to the underlying policy, the reinsured relationship (cf. Comments 8 et seq., 18 et seq. and 30).
C5 In most classes of insurance, the point in time when the coverage obligation emerges is non-controversial. However, particularly in third-party liability insurance, it may be ambiguous when the coverage obligation is activated under a given policy.
3. Obligations of the reinsured as a consequence of the materialization of a peril insured against
C6 Article 4.2 only addresses obligations of the reinsured arising as a consequence of the materialization of a peril insured against under a reinsured relationship. The wording shall be construed in a broad way, so as to encompass not only the insurance benefit but all of the reinsured’s pecuniary obligations causally connected to the materialization of a peril insured against under the reinsured relationship (cf. Article 1:201(2) PEICL). For example, costs incurred to obtain an expert opinion required to settle an insurance claim also arise as a consequence of an insured peril having materialized.
C7 By contrast, the wording emphasizes the fact that the notion of the concept of “losses occurring” shall not cover the reinsured’s pecuniary obligations vis-à-vis the policyholder which are unrelated to the materialization of a peril insured against under the reinsured relationship, irrespective of their legal basis. This would be the case for, inter alia, premiums claimed and recovered by a policyholder upon retroactively avoiding its insurance contract. Such payments by the reinsured would admittedly not even be covered by the contract of reinsurance. In general, it shall be noted that the rules on loss allocation merely play a role in determining the temporal scope of reinsurance coverage, they do not extend reinsurance coverage beyond the terms and conditions agreed by the contracting parties (cf. also Comment 30).
4. The emergence of the obligation of the reinsured
C8 The emergence of the reinsured’s coverage obligation as a consequence of the materialization of a peril insured against under the reinsured relationship (see Comment 10) is the decisive factor for allocation under Article 4.2; said obligation must arise during the period of a contract of reinsurance (see Article 7.1) in order to be allocated thereto (for the general relevance of the reinsurance period, cf. Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [41]). In contrast, the materialization of the peril insured against, which forms the basis of the reinsured’s coverage obligation, is not required to take place during the reinsurance period as a matter of principle.
C9 In order to determine which condition evokes the coverage obligation of the reinsured under the reinsured relationship, the terms and conditions of the reinsured relationship must be considered in their entirety, giving due regard to the contract as a whole. The terms and conditions of the reinsured relationship are to be construed under the law applicable to it (for the relevance and role of the law governing the reinsured relationship, see Comments 18 et seq.).
C10 In some jurisdictions, reference is made to the “trigger of coverage”, in particular in the context of third-party liability insurance. The term “trigger of coverage” is “a shorthand expression for identifying the events that must occur during the policy period to require coverage for losses sustained by the policyholder” (Owens-Illinois, Inc v United Ins Co, 138 NJ 437, 650 A2d 974, 976 (NJ 1994)) or, under another definition “that which, under the specific terms of an insurance policy must happen in the policy period in order for the potential of coverage to arise” (Montrose Chem Corp v Admiral Ins Co, 10 Cal 4th 645, 42 Cal Rptr 2d 324, 913 P2d 878, 880 et seq. (1995)). The latter definition is especially helpful in building a link between the terms “trigger of coverage” and “insured event”. An “insured event” means the occurrence of the uncertain event defined in the insurance contract (cf. Article 1:201 Comment 5 PEICL) and has the effect of converting the insurer’s obligation to bear the risk assumed into an obligation to bear the financial consequences of the insured event pursuant to the terms and conditions of the insurance contract (coverage obligation; cf. Schauer 145). The term “trigger of coverage” is used to denote the condition that activates an insurer’s coverage obligation under an insurance contract (cf. Mathias, Shugrue & Marrinson 9-60; also for example Hoechst Celanese Corp v Certain Underwriters at Lloyd’s of London, 673 A2d 164, 166 (Del 1996)) and therefore refers to the fact constituting the insured event under a specific insurance contract (cf. Article 14:107 Comment 2 PEICL).
C11 The determination of the relevant triggering factor in a particular case primarily depends upon the language of the policy (Andrea 813, 830; e.g. Don’s Bldg Supply, Inc v OneBeacon Ins Co, 267 SW3d 20 (Tex 2008)). However, the applicable law may also play a role (cf. EnergyNorth Natural Gas, Inc v Underwriters at Lloydʼs, 150 NH 828, 848 A2d 715 (NH 2004); for the relevance of the governing law, see Comments 18 et seq. below).
C12 For example, under a contract of third-party liability insurance, an insurer’s coverage obligation may be activated: by the insured committing an act or by the occurrence of a fact for which the insured is legally liable that could conceivably have led to the loss or damage (exposure trigger, the first such act among multiple acts or the first such fact among multiple facts is relevant); by the insured committing the initial act ultimately causing damage or by the occurrence of a fact ultimately causing damage for which the insured is legally liable, by the actual occurrence of loss or damage to a third person (injury-in-fact trigger); by the manifestation of loss or damage to a third person (manifestation trigger); by the making of a claim for damages against the policyholder by a third person (claims made); or by the policyholder notifying the insurer of a claim for damages made against the policyholder by a third person (claims made and reported) (cf. Article 14:107 PEICL; Mathias, Shugrue & Marrinson 9-60 et seq.; Malpigli 283 et seq.). Some insurance policies refer to a combination of the basic triggering factors (cf. Joe Harden Builders Inc v Aetna Cas and Sur Co, 486 SE2d 89 (SC 1997)) or adopt multiple triggers (Fischer 625, 641). With regard to the continuous trigger, see Comments 26 et seq.
C13 Identical factual circumstances therefore do not require the same allocation where the terms and conditions of the reinsured relationships in question vary (see also EnergyNorth Natural Gas, Inc v Underwriters at Lloydʼs, 150 NH 828, 848 A2d 715 (NH 2004)).
Illustration
I1. A manufacturer produces a defective oven. After being sold, the oven explodes and injures the buyer when preparing Christmas dinner on 25 December 2017. The buyer only makes the claim against the manufacturer after returning from hospital on 15 January 2018. The manufacturer has product liability coverage in place; the contract of reinsurance covering the product liability policy is written on a “losses occurring” basis and renewed annually, with 1 January as the date of renewal.
a) According to the underlying insurance contract, coverage is triggered by the actual occurrence of loss or damage to a third person (injury-in-fact trigger). Thus, the Reinsured’s coverage obligation arose on 25 December 2017 – at the point in time when the oven exploded, causing the buyer’s injury. Pursuant to Article 4.2, the coverage obligation of the Reinsured will be allocated to the contract of reinsurance covering the calendar and underwriting year 2017.
b) According to the underlying insurance contract, coverage is triggered by the making of a claim for damages by a victim based on the policyholder’s product liability (cf. Article 14:107(2) PEICL). Thus, the Reinsured’s coverage obligation arose on 15 January 2018 – at the point in time when the claim was made by the buyer. Pursuant to Article 4.2, the coverage obligation of the Reinsured will be allocated to the contract of reinsurance covering the calendar and underwriting year 2018. It is irrelevant that the occurrence of the accident and injury forming the basis of the claim falls outside the reinsurance period (cf. Comment 8), because the insurance contract defines the insured event with reference to a claim made by the victim, not to the occurrence of loss or damage to a victim that gives rise to insured’s product liability.
C14 In the course of a loss settlement, the reinsured interprets the terms and conditions of the reinsured relationship and, on this basis, determines at which point in time its coverage obligation emerged (as to the relevance of the law governing the reinsured relationship, see Comments 18 et seq.). The assessment of the reinsured falls within the scope of the reinsurer’s duty to follow the settlements enshrined in Article 2.4.3. As a consequence, the extent to which the reinsured’s determination may be reviewed is considerably limited.
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I2. In the context of a loss settlement, Reinsurer A, an insurer under a third-party liability insurance contract, takes the position that the policyholder’s obligation to compensate its employee arose when it first exposed the latter to asbestos and not when the consequential illness manifested in the form of a mesothelioma. Reinsurer B may only review Reinsured A’s assessment on the grounds acknowledged by the duty to follow the settlements.
C15 There may be a dispute between the reinsured and its policyholder, or a victim, as to the proper ascertainment of the condition activating the reinsured’s coverage obligation under the reinsured relationship. In case mutual understanding cannot be achieved, a court or an arbitral tribunal will ultimately decide on the emergence of the reinsured’s coverage obligation on the basis of the content of the reinsured relationship and the law governing it. The reinsurer is obligated to accept and abide by such ruling by virtue of the duty to follow the fortunes enshrined in Article 2.4.3.
C16 In treaty reinsurance, changes and amendments to the terms and conditions of the reinsured relationship generally bind the reinsurer. In facultative reinsurance, alterations to the terms and conditions of the reinsured relationship agreed between the reinsured and its policyholder that affect the risk, the scope of cover or the premium require the approval of the reinsurer in order to be effective at the reinsurance level (Gerathewohl (1980) 470 et seq.). The same is true of an agreement regarding the definition and construction of the relevant triggering factor. Furthermore, under a reinsurance treaty, an agreement between the reinsured and its policyholder that seeks to manipulate the coverage obligation of the reinsured which has in fact already arisen has no bearing on the reinsurer. The reinsured shall not be able to provoke the liability of the reinsurer by creating or temporally influencing its own contractual coverage obligation by means of such agreement with the policyholder. Thus, although an alteration to the terms and conditions of the reinsured relationship affecting the emergence of the coverage obligation of the reinsured may retain its validity within the reinsured relationship, self-interested agreements of this kind between the reinsured and its policyholder are, on the basis of the duty of utmost good faith (Article 2.1.2), deemed ineffective at the level of reinsurance once the coverage obligation of the reinsured has in fact arisen. This outcome is consistent with the general principle of insurance law that an insurer is not obligated to perform if the insured event was intentionally caused by the policyholder (cf. Article 9:101 PEICL).
C17 It should be noted that further conceivable attachment points are irrelevant for the purpose of loss allocation under the PRICL. These generally include, but are not limited to: the date on which the policyholder became aware of the loss or damage (although a claim made is relevant under an insurance policy based on claims made, cf. Comment 12); the date on which the reinsured was notified of a claim (unless the reinsured relationship is based on claims made and reported); the date on which proof of the loss or damage was submitted to the reinsured; the date on which the loss or damage was quantified; the date on which the reinsured’s pecuniary performance under the reinsured relationship became due; the date on which the reinsured actually made payment to its policyholder or any third person pursuant to the reinsured relationship; or the date on which the policyholder or a third person received such payment. Similarly, a (conditional and/or partial) prepayment of the insurance benefit prior to the emergence of the reinsured’s coverage obligation has no influence on the allocation of said obligation at the reinsurance level.
5. The role of the law governing the reinsured relationship
a. In general
C18 The terms and conditions of the reinsured relationship are not to be viewed in isolation from the provisions of the law governing it. First, as a matter of principle, the content of the reinsured relationship is to be construed under the governing law (see Comments 9 et seq. above). Second, the governing law may play a role in establishing the insured event as well as in determining the impact of particular facts upon coverage under the reinsured relationship being triggered and upon the emergence of the reinsured’s coverage obligation (cf. Comments 20 et seq.; with regard to the continuous trigger, Comments 26 et seq.).
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I3. In some jurisdictions, it is recognized that under a third-party liability insurance contract “an occurrence happens when the injurious effects of the occurrence become ‘apparent’ or ‘manifest themselves’”. (cf. Honeycomb Systems Inc v Admiral Ins Co, 567 F Supp 1400 (D Me 1983) with further references). Thus, under a third-party liability insurance contract referring to an “occurrence”, the coverage obligation of the insurer arises upon the manifestation of loss or damage (manifestation trigger).
It is therefore advisable to either include a choice of law in the reinsured relationship or to otherwise ensure that the law applicable to the reinsured relationship is clearly identifiable (cf. Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [44], [49]). Regardless of whether the law governing the particular reinsured relationship can be unambiguously ascertained prior to any dispute about the coverage provided thereunder, reinsurers are generally deemed to be aware of the prevailing or relatively common rules of insurance and reinsurance law in the jurisdictions in which they do business (cf. Groupama Navigation et Transports v Catatumbo CA Seguros [2000] 2 Lloyd’s Rep 350 [20]). By contrast, provisions of the law governing the reinsured relationship that have an impact on the allocation under Article 4.2 with unusual or surprising content – in particular those of mandatory nature – are subject to the duty of disclosure as enshrined in Article 2.2.1.
C19 Determining whether a rule of the law applicable to the reinsured relationship supersedes a term of the reinsured relationship depends on whether the rule in question is of a mandatory or non-mandatory nature. The PRICL will recognize the legal construction of the insured event and of the relevant triggering factor pursuant to the content of the reinsured relationship and the law applicable to it, thus including any mandatory rules of the governing law superseding particular terms and conditions of the reinsured relationship.
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I4. Article 142 of the Belgian Insurance Act mandatorily provides for coverage on a “loss occurrence” basis with respect to certain liability insurance contracts.
C20 Alternatively, the law governing the reinsured relationship may contain a default rule from which the individual contracts may deviate.
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I5. Article 14:107(1) PEICL contains a default rule for general liability insurance contracts, defining as the insured event the fact giving rise to the insured’s liability that occurred during the liability period of the insurance contract. However, the parties to an insurance contract for commercial or professional purposes may define the insured event with reference to other criteria, such as a claim made by a victim.
C21 The law governing the reinsured relationship also provides a framework for interpreting the terms and conditions of the reinsured relationship (e.g. the US principles of interpretation for comprehensive general liability policies, see Andrea 813, 821 et seq.). The content of the reinsured relationship may namely need to be interpreted in order to properly construe the insured event and to determine the triggering factor which activates the reinsured’s coverage obligation under the given reinsured relationship (cf. EnergyNorth Natural Gas, Inc v Underwriters at Lloydʼs, 150 NH 828, 848 A2d 715 (NH 2004)).
C22 It is conceivable that, after formation of the reinsured relationship, a term agreed upon is declared void by a court or an arbitral tribunal due to incompatibility with a mandatory rule or principle of the governing law. This danger particularly pertains to standard terms incorporated into the reinsured relationship (cf. BGH IV ZR 135/91 VersR 1993, 223, 225; incompatibility denied in the given case). If a contract term relevant to the determination of the insured event is declared void, it will be replaced by way of contract interpretation or supplementation, or, alternatively, by a non-mandatory default rule of the law governing the reinsured relationship, where such rule exists. For the purposes of Article 4.2, the condition provoking the emergence of the reinsured’s coverage obligation in a given case shall be identified in accordance with the prevailing law governing the reinsured relationship. Reinsurance allocation is therefore based on the outcome and legal consequences of any decision made by a court or an arbitral tribunal declaring that a relevant term of the reinsured relationship is void or superseded by another rule. This also applies to situations in which a court or an arbitral tribunal curtails the application of a contract term but does not invalidate the contract term in its entirety.
C23 The reasonableness of the reinsuredʼs assessment in the course of a loss settlement as to the occurrence of an insured event, the relevant triggering factor and the consequential emergence of the reinsuredʼs coverage obligation is to be evaluated not only with reference to the terms and conditions of the reinsured relationship, but also according to the law governing it (cf. Sneed 59, 65). Mandatory rules of the law governing the reinsured relationship define the scope of application of the standard of reasonable claims behaviour.
C24 The reinsurer must also abide by the changes in the law applicable to the reinsured relationship following the formation of the contract of reinsurance (cf. Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [110]). Under Article 4.2, the point in time at which the coverage obligation of the reinsured arises is to be assessed with regard to the law governing the reinsured relationship (cf. Comments 18 et seq.). An amendment to the applicable (in particular: mandatory) law may therefore alter the reinsurance allocation, even if such change was unpredictable and not considered in the computation of the reinsurance premium. It should be noted that the applicable trigger of coverage has not yet been established in some States in the US (cf. Mathias, Shugrue & Marrinson 9-73 et seq.).
b. Continuous trigger (triple trigger)
I6. Under the continuous trigger, liability for a loss extends to all insurers on the risk from initial exposure up to the final manifestation of the loss (Keene Corp v Ins Co of North America, 667 F2d 1034 (DC Cir 1981); United States Fidelity & Guaranty Co v Thomas Solvent Co, 683 F Supp 1139, 1163 (WD Mich 1988); Andrea 813, 844; Mathias, Shugrue & Marrinson 9-64; Malpigli 285). Consequently, the insurer’s coverage obligation arises under each insurance contract covering at least a part of this time span. As the relevant time span usually stretches over multiple insurance periods, many insurers (and consequently, reinsurers) are impacted (for an overview, see Andrea 813, 844 et seq.).
C25 Application of the continuous trigger may be supported by the wording of the reinsured relationship as interpreted under the relevant law (cf. Alcoa v Aetna Cas & Sur Co, 998 P2d 856 (Wash 2000); cf. Comment 11). Nevertheless, if the continuous trigger is adopted by a court without regard to the terms and conditions of the reinsured relationship or even despite policy language to the contrary, the court is enforcing a mandatory principle of the applicable insurance law. When buying reinsurance coverage for policies governed by a law that mandatorily provides for the continuous trigger, the reinsured expects the reinsurance coverage to match the coverage under the reinsured policies in that regard. Nevertheless, the fact that the governing law provides for a mandatory continuous trigger should generally be addressed in the course of pre-contractual disclosure subject to the requirements set out in Article 2.2.1. In this regard, the PRICL adequately balances the legitimate interests and expectations of both parties when entering into a contract of reinsurance (cf. also Comments 29 et seq.).
However, application of the continuous trigger does not, by itself, determine the amount of liability arising under an individual insurance contract covering a part of the relevant time span. The overall loss may be apportioned among the liable insurers; e.g. pro rata to the periods of coverage, with the insured being treated as a self-insurer for the periods when no insurance coverage was in place (Ins Co of North America v Forty-Eight Insulations Inc, 633 F2d 1212 (6th Cir 1980)). Alternatively, the insurers may be jointly and severally liable for the whole loss (“all sums”; Keene Corp v Ins Co of North America, 667 F2d 1034 (DC Cir 1981)). The latter approach does not mean that the financial consequences of the whole loss will ultimately be borne by one insurer randomly chosen among the liable insurers by the policyholder: the performing insurer may seek contributions from other insurers on the risk during the relevant time span (Boston Gas Co v Century Indem Co, 529 F3d 8 (1st Cir 2008)). Under the PRICL, this option transforms into an obligation: a reinsured cannot claim payment under a contract of reinsurance without first seeking contributions from other liable insurers (cf. Comment 5 to Article 2.4.2).
6. Reinsurance allocation and back-to-back coverage
C26 US and English law employ, to varying extent, a presumption of back-to-back coverage as regards the interpretation of terms that have been incorporated from the underlying insurance contract (see further Comments 31 et seq. to Article 6.1.1 and Comments 5–8 to Article 6.1.3). The Principles have not adopted a back-to-back presumption. Instead, the parties can create matching cover with any of the methods set out in Article 6.1.1(1) and subject to the limitations in Article 6.1.1(3).
C27 Article 4.2 is not concerned with creating matching cover. Rather, it defers to the underlying insurance contract to determine the point in time at which the coverage obligation of the reinsured emerged under the reinsured relationship (cf. Comment 4). According to paragraph (2), the said point in time is to be determined at the underlying level pursuant to the terms and conditions of the reinsured relationship and the law applicable thereto (cf. Comments 9 et seq., 18 et seq. and 25 ). In this way, the reinsured relationship is determinative for reinsurance allocation under the PRICL.
C28 The approach followed by Article 4.2 thus – for the purpose of reinsurance allocation – eliminates the need to examine to what extent the effect of terms and conditions of the reinsured relationship incorporated directly or by reference into the contract of reinsurance can be realized at the reinsurance level (cf. O’Neill & Arnold-Dwyer 4-088–4-091, Clyde & Co 16.53 with further references). The model introduced in Article 4.2 is therefore appropriate for all types of contracts of reinsurance.
C29 In this way, Article 4.2 ensures the foreseeability of reinsurance allocation and promotes coherent outcomes under the reinsured relationship and under the contract of reinsurance, eliminating the risk of undesired disparities. The reinsurer will be aware of the fact that the terms and conditions of the reinsured relationship and the law applicable thereto are relevant for its liability under the contract of reinsurance. The allocation of losses may have an effect on the aggregation of losses as only the losses allocated to the same policy year are to be aggregated under the PRICL (see Comment 7 to Article 5.1; cf. also William 6.22 et seq.). The parties to the contract of reinsurance therefore give due consideration to the approach set out in Article 4.2 when defining the scope of coverage and setting the limits, retention and reinsurance premium.
C30 The default rule of reinsurance allocation in Article 4.2 is related to the temporal scope of the contract of reinsurance. However, it does not have the effect of altering the temporal scope as defined by the reinsurance period clause (see Article 7.1) or the substantive scope (e.g. risks covered) of reinsurance coverage agreed between the parties to the contract of reinsurance. Article 4.2 merely identifies the contract of reinsurance to which the adverse financial consequences of a reinsured’s coverage obligation under a reinsured relationship are to be allocated. Whether the reinsurer will actually be obligated to make payment to the reinsured must be determined under the respective contract of reinsurance, in particular by reference to the substantive scope of reinsurance coverage (cf. also Hill v Mercantile and Gen Reins Co Plc [1996] 1 WLR 1239, 1251; Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [58] et seq.).