1.          Introduction

C1        A reinsured must, in order to recover from its reinsurers, establish two quite distinct matters: (a) the reinsured’s own liability to its policyholder(s) under the terms of the insurance contract; and (b) the reinsurers’ liability to the reinsured under the terms of the contract of reinsurance. There is no necessary link between these two matters: the insurance contract and the contract of reinsurance are two separate contracts, only the reinsured is party to both, and the provisions of the two contracts will by definition not be identical. It is important to bear in mind that “follow the settlements” and “follow the fortunes” provisions – under established principles of reinsurance law as incorporated into the Principles – are directed only to point (a). The effect of the Principles, Article 2.4.3, is that reinsurers are bound by judgments and arbitration awards against the reinsured (other than in exceptional circumstances where they have not been properly defended) and that settlements entered into by the reinsured are also largely immune from challenge by reinsurers.

C2        However, none of this assists the reinsured with point (b), namely, establishing liability under the terms of the contract of reinsurance. It is also to be borne in mind that the insurance contract and the contract of reinsurance will almost always have different applicable laws, in that the insurance contract is governed by whatever law the insured and reinsured have selected (which may be a choice of the PEICL or a given domestic law or, in the absence of choice a law, the law determined by the relevant conflicts rules of the forum) whereas the contract of reinsurance is governed by the Principles (where they have been validly adopted as the governing law of the contract of reinsurance) or a domestic law chose by the parties (or, in the absence of choice a law, the law determined by the relevant conflicts rules of the forum).

C3        It is therefore necessary for the Principles to determine two linked questions: (1) to what extent do the terms of the insurance contract and the contract of reinsurance match each other; and (2) to the extent that they do match, where the reinsured’s liability under the terms of the insurance contract is established and quantified, is liability under the terms of the contract of reinsurance demonstrated? The Principles have answered these questions in the following way.

C4        First, in Article 6.1.1, the Principles permit the parties to the contract of reinsurance to incorporate the terms of the insurance contract into the contract of reinsurance so that the terms of the two contracts match each other and create back-to-back cover (also referred to as ‘co-extensive’ cover in the US). However, not all terms can be incorporated in this way. Some provisions of the two contracts will inevitably be different, and what makes sense in a insurance contract may be nonsense in a contract of reinsurance. It is thus necessary to delineate those terms capable of incorporation from the insurance contract into the contract of reinsurance, and those which can operate only at the insurance level. Those that are capable of incorporation and have been incorporated are referred to as “incorporated matching terms”.

C5        Second, in Article 6.1.2, the Principles address the situation where the terms of the underlying insurance contract change after the formation of the contract of reinsurance. The general principle is that a term in the underlying insurance contract that has been modified after the formation of the contract of reinsurance does not become a term under the contract of reinsurance. Instead, the contract of reinsurance continues to be on the original incorporated matching terms as at the time of formation. However, the Principles also recognize that, where the reinsurer has consented to a modified term to become incorporated in the contract of reinsurance, the reinsurer will be bound by that term.

C6        Third, in Article 6.1.3, the Principles provide that if the terms of the insurance contract are incorporated into the contract of reinsurance, then irrespective of the fact that the two contracts do not share an applicable law, incorporated matching terms are to be construed in an identical fashion at the reinsurance level. Putting the matter in a slightly different way, a judgment, award or settlement against the reinsured that is binding on the reinsurers for the purpose of establishing the reinsured’s own liability to its policyholder(s) cannot be indirectly challenged by the reinsurers pleading a different interpretation of the same words or clause at the reinsurance level. In respect of incorporated matching terms, the Principles thus operate as a surrogate for the governing law of the contract of reinsurance to be the same as the law applicable to the insurance, depriving the reinsurers of any independent defence under the reinsurance.

C7        A word of warning is necessary here. It is important to distinguish between a “follow the settlements/follow the fortunes” clause and the wording of incorporation by “follow the form”, “as original” or equivalent wording. The former concepts are addressed in the Principles, Article 2.4.3 and are concerned with the establishment of the reinsured’s liability to its policyholders and says nothing about liability under the contract of reinsurance. A follow-the-form clause cannot be used to require the reinsurers to recognize the liability of the reinsured to its policyholders under its insurance contracts, and is concerned only with the reinsurers’ liability under the contract of reinsurance once the underlying liability has been established. The distinction was blurred in Lexington Ins Co v Clearwater Ins Co, 28 Mass L Rep 519 (Mass Super Ct 2011), where it was held that follow-the-form wording required the reinsurers to follow the reinsured’s allocation of loss between different policies. That conclusion was subsequently rejected in New Hampshire Ins Co v Clearwater Ins Co, 7 NYS3d 38 (NY App Div, 1st Dep’t 2015). See also Granite State Ins Co v Clearwater Ins Co, 2016 NY Misc LEXIS 2314, 2016 WL 3386982 (NY Sup Ct 2016) and Utica Mutual Ins Co v Clearwater Ins Co, 906 F3d 12 (2d Cir 2018) (applying New York law), where it was made clear that incorporation of coverage said nothing about the reinsurers’ duty to follow settlements.

C8        This commentary is confined to the leading common law jurisdictions drawing on a rich body of case law, although many disputes on back-to-back cover are resolved in the privacy of arbitration. There is very little authority on this matter in the civil law.

C9        It is also noted that the Principles envisage that Articles 6.1.1–6.1.3 will apply to facultative reinsurance. Although treaty reinsurance is not excluded from the scope of Articles 6.1.1–6.1.3, there would need to be clear evidence that the parties to the treaty had the intention to create matching cover, and which set of terms are to be matched in the contract of reinsurance, by reference to the categories in Article 6.1.1(1)(a)–(c).

2.          Historical development of back-to-back cover wordings

C10     Immediately following the repeal of the ban on reinsurance in England in 1867, reinsurance disputes started to come before the courts. The earliest cases show that facultative reinsurance took the form of the underlying policy with the addition of two sets of words: (1) “to be paid as on original policy” or “to pay, as may be paid thereon” and (2) “subject to all clauses and conditions of the original policy”. By the 1920s these two types of wording were combined into what became known as the “full reinsurance clause”, namely “as original and follow settlements.”

C11     The “pay to be paid” wording was the precursor of the modern “follow the settlements” or “follow the fortunes” wording. In the first decision on the “subject to” wording, Joyce v Realm Marine Ins Co (1871-72) LR 7 QB 580, it was held that the wider scope of an insurance policy setting out the trigger for a cargo risk overrode the narrower wording of the contract of reinsurance. Since that decision, incorporation wording has been all but standard in facultative reinsurance, and although it is found in some treaties, the practice varies between different classes of insurance and between insurers. It is not relevant to non-proportional reinsurance, which responds to aggregate insured losses rather than individual claims. In England, the incorporation wording has changed over the years, moving in the 1930s to “all terms and conditions as original” and these days sometimes simply “as original”.

C12     In the US, the typical formulation is “follow the form” or simply “follow form.” There is no standard wording, and a variety of formulations have been found. Some do not use the word “follow” at all, referring instead to “concurrent coverage” and “coextensive coverage”. It suffices that the contract of reinsurance is stated to be “subject in all respects to the terms and conditions of [the primary insurer’s] policy” (Gerling Global Reins Co v Ace Property & Cas Ins Co, 42 Fed Appx 522 (2d Cir 2002)) (applying New York law). Follow-the-form wordings include:

-       all the terms and conditions of the reinsured insurance policy are incorporated by reference into the reinsurance contract, except insofar as the reinsurance and insurance contracts conflict (see e.g. North River Ins Co v CIGNA Reins Co, 52 F3d 1194, 1204 (3d Cir 1995) (applying Ohio law); Utica Mutual Ins Co v Clearwater Ins Co, 906 F3d 12, 16 (2d Cir 2018));

-       this Policy shall follow the terms, definitions, conditions and exclusions of [the] primary policy … issued by [the reinsured], subject to the policy period, policy limits, premiums and all other terms, definitions, conditions and exclusions of this Policy. If any provisions of the underlying policy(ies) conflict with any provisions with this policy, the provisions of this Policy will apply. In no event will this Policy provide broader coverage than that provided by the primary and underlying insurer(s) (Premier Entertainment Biloxi LLC v James River Ins Co, 2007 US Dist LEXIS 74099, *12, 2007 WL 2908791 (SD Miss 2007));

-       “following the terms, conditions and limitations of the [reinsured’s Policies to the insured]”, and “following the terms, conditions, exclusions and limitations of the [cedent’s Insurance Policy sold to the insured]” (Aetna Cas & Sur Co v Home Ins Co, 882 F Supp 1328, 1345 (SDNY 1995));

-       [the reinsurer’s] liability … shall follow [the reinsured’s] liability in accordance with the terms and conditions of the policy reinsured hereunder (New Hampshire Ins Co v Clearwater Ins Co, 7 NYS3d 38, 42 (NY App Div, 1st Dep’t 2015));

-       [t]he liability of [the reinsurer] shall follow that of [the reinsured] and, except as otherwise provided by this Certificate, shall be subject in all respects to all the terms and conditions of [the reinsured’s] policy except such as may purport to create a direct obligation of [the reinsurer] to the original insured or anyone other than [the reinsured] (Unigard Sec Ins Co, Inc v North River Ins Co, 4 F3d 1049, 1055 (2d Cir 1993) (applying Ohio law));

-       [t]he liability of [the reinsurer] … shall follow that of [the primary insurer] and except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [the primary insurer’s] policy except such as may purport to create a direct obligation of [the reinsurer] to [the insured] (North River Ins Co v CIGNA Reins Co, 52 F3d 1194, 1204 (3d Cir 1995) (applying Ohio law)).

C13     As was commented in Wisconsin Local Government Property Ins Fund v Lexington Ins Co, 100 F Supp 3d 687, 691–92 (ED Wis 2015), follow-the-form policies are typically very short, doing little more than incorporating the terms of the underlying insurance policy. However, in this dispute, the reinsurance policy was a long and detailed thirty-one pages. Although the court acknowledged that, given the details of the policy, it was strange to characterize the policy at issue as a follow-the-form policy, it ultimately found neither the strange nature of the policy nor anything in the policy itself required the court to read the follow-the-form endorsement in any way other than by its plain terms, which made it clear that the reinsurance certificate followed the form of the underlying policy.

C14     One of the characteristics of the London market is the use of “fronting”, whereby the risk is practically written by reinsurers with local insurers ceding 100 percent of the risk to the reinsurers in return for ceding commission. Under such arrangements, it is absolutely essential that the insurer’s liability is matched by that of the reinsurers.

C15     As already indicated, incorporation should be distinguished from “follow settlements”, “follow fortunes” and their precursor “pay as may be paid thereon”. Those words may well form a part of the incorporation clause, but they have a different function. Incorporation is to ensure that there is no inconsistency between the wording of the insurance contract and the contract of reinsurance, so that cover matches. “Follow settlements” and similar phrases relate to a decision taken by the insurer to make payment on a claim, even though there are possible defences and require the reinsurer to accept that the settlement falls within the terms of the insurance contract. A “follow settlements” clause has a different scope and purpose, and reference is made to the Principles, see Article 2.4.3.

C16     The “as original” wording is designed to incorporate the terms of the direct cover into the contract of reinsurance by reference so that there is no divergence between the insurance contract and the contract of reinsurance. The general assumption of the English courts is that the phrase does have an incorporating effect: Joyce v Realm Marine Ins Co (1871-72) LR 7 QB 580; Barnard v Faber [1893] 1 QB 340; Walker & Sons v Uzielli (1896) 1 Com Cas 492; Bancroft v Heath (1901) 17 TLR 425. Paragraph (1)(a) adopts the method of incorporation by reference for creating matching cover.

3.          Paragraph (1): Agreement on matching cover

C17     The Principles anticipate three methods of creating matching cover: first, subparagraph (a) contemplates the incorporation of the terms of the underlying insurance contract by using general words. The Principles do not prescribe any particular form of words to be used for incorporation, but market practice would be to use words such as “all terms and conditions as original”, “as original” or “follow (the) form”, or their respective equivalents. As will be explained in Comments 24 and 25 below, this does not, however, mean that the terms of the underlying insurance contract are incorporated in their totality.

C18     Second, subparagraph (b) provides that matching cover can be achieved by use in the contract of reinsurance of identical wording – or at least in substance identical wording – to that used in the insurance contract. Essentially, subparagraph (b) envisages copy-pasting clauses concerned with coverage contained in the insurance contract into the contract of reinsurance. The reference to “terms identical in substance” has been added to address the situation where minor drafting changes have been made to adapt the text to the context and style of a contract of reinsurance (e.g. changing references to “insurer” to “reinsurer” and “insured” to “reinsured” or “cedent”, but as regards the manipulation of language note Comment 28 below). Using express terms in the contract of reinsurance that are identical in substance to terms in the underlying insurance contract is indicative of the parties’ intention to create matching cover, even if there are minor drafting variations or omissions that merely reflect the drafting style of the contract of reinsurance (see also Tokio Marine Europe Ins Ltd v Novae Corporate Underwriting Ltd [2013] EWHC 3362 (Comm)).

C19     It should, however, be noted that differences in wording can be taken to demonstrate an intention to produce a different meaning, a different scope or extent of coverage. This is specifically addressed in paragraph (3) (see Comment 34 below). To avoid arguments about the degree and the significance of any variation, it is essential for different words and wordings to be used only where the intention is to depart from the meaning of the insurance policy. This may be done by express exclusion or by the use of words or definitions which make it clear that the coverage of the reinsurance is more limited in scope.

C20     In contrast, where it is shown that the two agreements have been negotiated independently of each other, there is no obvious room for finding an intention of the parties to create matching cover. In particular, excess of loss treaties are generally drafted in terms quite different from those of the underlying insurance contract, and in general they will not contain provisions for matching cover that justify a common interpretation. However, where an excess of loss treaty uses terms with identical language as the terms in the underlying insurance contract, the Principles – pursuant to subparagraph (b) – may consider them to be matching terms.

C21     Third, subparagraph (c) is a sweep up provision that allows for the possibility that the parties agree on matching cover by means other than the methods listed in subparagraphs (a) and (b), provided that this can be established as a matter of interpretation of the contract of reinsurance. Reference is made to Article 4.1(1) PICC which requires a contract to be interpreted according to the common intention of the parties. In the absence of the incorporation of coverage terms or the direct copy-pasting of such terms, there would need to be clear indications that the parties intended the contract of reinsurance to match the insurance contract.

4.          Paragraph (2): Material matching terms

C22     General words of incorporation carry from the insurance contract into the contract of reinsurance only those terms which relate to the risk run by the insurer(s). This has, in the past, led to disputes as to which terms are, or are not, incorporated.

C23     Under English law, the term in question must be suitable for incorporation. This is the position even where the operative incorporation wording refers to “all terms and conditions as original”. Although the full reinsurance clause may refer to the “same … terms”, the courts have rejected the wholesale incorporation of all terms of the underlying insurance contract and will consider whether individual terms are suitable for incorporation. This is assessed as a matter of construction of the contract of reinsurance and the surrounding circumstances (Wasa International Ins Co Ltd v Lexington Ins Co [2009] Lloyd’s Rep IR 675) and by reference to a number of criteria (HIH Cas & Gen Ins Ltd v New Hampshire Ins Co [2001] EWCA Civ 735):

-       the term is germane to the contract of reinsurance in question;

-       the term makes sense without undue manipulation;

-       the term is consistent with the express terms; and

-       the term is apposite for inclusion.

C24     The Principles, in paragraph (2), create greater certainty than the criteria set out in Comment 23 above by describing those terms that are allowed to travel into the contract of reinsurance pursuant to subparagraph (a) as terms that are “material to the scope and the extent of cover”, and by providing a non-exhaustive list of examples of such terms. Paragraph (2) captures terms that are concerned with the scope of cover – such as terms relating to the insured perils and risks, exclusions, terms rendering certain losses ineligible to be indemnified, geographical and temporal scope of the cover – as well as terms concerned with the extent or quantum of cover – such as limits, deductibles, and aggregation provisions.

C25     In contrast, terms contained in the insurance contract that are not material to the scope or extent of the cover are not automatically carried into the contract of reinsurance on the basis of general words of incorporation by reference (as discussed above in relation to paragraph (1)(a)). Of course, it would be open to the parties to agree that terms that do not meet the “material to the scope or extent of the cover” test nevertheless apply to the contract of reinsurance (e.g. by using express identical wording – see method in paragraph (1)(b)). The PRICL provisions do not include a definitive list or a list of examples of terms that do not travel. However, the following types of clauses would not meet the test of being “material to the scope and extent of cover”:

-       any obligations imposed by the policyholder on the insurance contract in the performance of the contract, such as, for example, compliance with loss-avoidance measures or payment of the premium;

-       any obligations imposed upon the policyholder following a loss, for example, the making and notification of claims within a particular time limit (see e.g. London & Midland Gen Ins Co v Kansa Gen Ins Co, Docket No 28133/88, 5 Mealey’s Reins Rep No 12 C, 1994 CarswellOnt 132 (Ont Ct of Justice 1994)

-       co-insurance clauses (see e.g. Imperial Fire Ins Co of London v Home Ins Co of New Orleans, 68 F 698, 703 (5th Cir 1895)  (applying federal common law) (co-insurance provisions of (underlying policy’s one year time limitation for bringing suit over fire loss not carried over to contract of reinsurance)) and/or in a particular form (Home Ins of New York v Victoria-Montreal Fire [1907] AC 59; CNA International Reins v Companhia de Seguros Tranquilidade [1999] Lloyd’s Rep IR 289; Municipal Mutual Ins Ltd v Sea Ins Co Ltd [1996] LRLR 265; New York Bowery Fire Ins Co v New York Fire Ins Co, WL 2588, 17 Wend 359 (NY Sup Ct Jud 1837)), mitigation of loss measures and steps to be taken by the policyholder to secure the subrogation rights of the insurers;

-       co-insurance clauses (see e.g. Imperial Fire Ins Co of London v Home Ins Co of New Orleans, 68 F 698, 703 (5th Cir 1895) (applying federal common law) (co-insurance provisions of underlying policy not applicable to contract of reinsurance because of different purposes and understandings of concept in underlying insurance and reinsurance));

-       forum selection and arbitration clauses (see Comment below).

C26     Forum and arbitration clauses adopted for the purposes of insurance contracts are not material to the scope and extent of the cover. Moreover, forum and arbitration clauses may be unsuitable for incorporation into the contract of reinsurance where the evidence and documents are held in a different jurisdiction. For these reasons, English courts have generally rejected the incorporation of forum and arbitration clauses by general words: see e.g. Pine Top Ins Co Ltd v Unione Italiana Anglo Saxon Reins Co Ltd [1987] 1 Lloyd’s Rep 476 and Prifti v Musini Sociedad Anonima de Seguros y Reaseguros [2004] Lloyd’s Rep IR 528. In contrast, in Progressive Cas Ins Co v CA Reaseguradora Nacional De Venezuela, 991 F2d 42 (2d Cir 1993) (applying New York law), the Second Circuit of the US Court of Appeals found that the “Subject to the Facultative Reinsurance Agreement” provision in the retrocession agreement referred to the reinsurance agreement by its name, and that the arbitration “concerning the interpretation of this Reinsurance Agreement” was also applicable concerning the interpretation of the retrocession agreement.

C27     Paragraph (2) would not support the incorporation of forum or arbitration clauses with the method set out in paragraph (1)(a) because they are not terms that are material to the scope and the extent of cover. The incorporation of forum and arbitration clauses would, however, be possible using the method set out in paragraph (1)(b): it would be open to the parties to agree that such a clause nevertheless applies to the contract of reinsurance by using express identical wording.

C28     There may be terms in the underlying insurance contract that could conceivably travel into the contract of reinsurance by reference to the English law criteria set out in Comment 23, but which would create ambiguity as to their operation in the reinsurance context. For example, a waiver in the underlying insurance contract of the insurer’s remedy of avoidance for breaches of the duty of disclosure incorporated into the contract of reinsurance could be construed as either (1) an incorporation of the term in fact and its unmanipulated form (i.e. as acceptance by the reinsurer of the effects of the reinsured’s waiver on the contract of reinsurance but not amounting to an equivalent waiver by the reinsurer), or (2) an incorporation of the term in a manipulated form so as to extend the waiver to the reinsurer’s remedy of avoidance (see HIH Cas & Gen Ins Ltd v New Hampshire Ins Co [2001] EWCA Civ 735). It is important to avoid such ambiguities. For this reason, paragraph (2) limits the application of incorporation of terms by general words of incorporation to terms that are material to the scope or extent of the cover, and paragraph (1)(b) limits the adoption of terms from the underlying insurance contract to express terms in the contract of reinsurance that are identical or nearly identical.

5.          Paragraph (3): Modifications and restrictions

C29     This provision recognizes that reinsurers may wish to modify and restrict coverage under the contract of reinsurance when compared with that in the insurance contract even where the terms of the insurance contract have apparently been incorporated wholesale into the contract of reinsurance. In case of conflict between a term that has been incorporated from the underlying insurance contract and an express term in the contract of reinsurance, the latter prevails. This is consistent with general contract law principles and is in line with Article 2.1.21 PICC. Despite matching cover provisions, the coverage under the contract of reinsurance may therefore deviate from the cover provided by the underlying insurance contract as a result of express wording in the contract of reinsurance.

C30     Paragraph (3) puts in place a clear rule that express terms in the contract of reinsurance override inconsistent terms from the underlying insurance contract that would have otherwise been regarded as incorporated. This goes towards addressing an area of legal uncertainty arising from the common law as to the extent to which there is a presumption of back-to-back cover that is used as a principle of construction.

C31     In the US, the presumption is that a follow-the-form clause in a contract of reinsurance is to be construed as meaning that reinsurance coverage is concurrent with that in the underlying insurance contract: Aetna Cas & Sur Co v Home Ins Co, 882 F Supp 1328, 1349 (SDNY 1995); Travelers Cas & Sur Co v ACE American Reins Co, 201 Fed Appx 40 (2d Cir 2006) (applying New York law). However, the presumption “can be overridden by clear language in the certificate that cuts off liability under the reinsurance policy even where the cedent is liable to the insured”; American Employers’ Ins Co v Swiss Reins America Corp, 413 F3d 129, 137 (1st Cir 2005). In Travelers Cas & Sur Co v ACE American Reins Co, 201 Fed Appx 40 (2d Cir 2006) (applying New York law), ACE provided reinsurance for excess insurance policies issued by Travelers. The ACE reinsurance certificates had a “follow the form” clause stating that the terms and conditions of liability of the certificates shall “follow” those of the primary policies, “except as otherwise specifically provided.” The certificates contained aggregation provisions referring to “each occ-agg” although neither “occurrence” nor “aggregate” was defined. However, the insurance contract defined those words by reference to annual aggregate limits. The court found that the contract of reinsurance did not “otherwise specifically provide” that the aggregate liability limits in the reinsurance certificates would not “follow the form” of the primary policies, so that there was coverage for three annual aggregate limits, rather than one three-year aggregate. See also Commercial Union Ins Co v Swiss Reins America Corp, 413 F3d 121 (1st Cir 2005) (applying Massachusetts and New York law); American Employers’ Ins Co v Swiss Reins America Corp, 413 F3d 129 (1st Cir 2005) (applying New Jersey law); Union Carbide Corp v Affiliated FM Ins Co, 947 NE2d 111 (NY 2011).

C32     The US case Ins Co of the State of Pa v Equitas Ins Ltd, 68 F4th 774 (2d Cir 2023) illustrates the uncertainty around the “back-to-back-presumption”. In that case, the court rejected the reinsurer’s argument that an express policy period clause in the contract of reinsurance governed by English law should override the allocation of liabilities that fell outside the reinsurance policy period based on an “all sums” allocation of liabilities under the underlying insurance contract governed by Hawaiian law. The court applied the back-to-back presumption in relation to the “all sums” allocation of liability, although doing so meant that the reinsurer would be liable for losses outside the reinsurance period as defined in an express term. In contrast, the UK House of Lords – confronted with a similar issue in Wasa International Ins Co Ltd v Lexington Ins Co [2009] Lloyd’s Rep IR 675 – reached the opposite conclusion prioritizing the express reinsurance period term over the back-to-back presumption. The extent to which there is an English common law rule of back-to-back interpretation is discussed further in Comments 5–8 to Article 6.1.3.

C33     The Principles have not adopted a back-to-back presumption. Instead, they acknowledge that the parties may wish to create matching cover with any of the methods set out in paragraph (1). Where the parties have the intention to create matching cover, the Principles have taken a three-pronged approach to address the uncertainty created by the common law: first, paragraph (3) (first sentence) contains a clear rule that the parties can agree to limit the extent to which the reinsurance cover should match the cover provided by the underlying insurance contract. Secondly, paragraph (3) (second sentence) clarifies that express terms in the contract of reinsurance prevail over a term that would otherwise be regarded as incorporated under paragraph (1)(a). Thirdly, there are specific interpretation rules that apply to incorporated matching terms as set out in paragraph (3).

C34     Pursuant to paragraph (3), if the contract of reinsurance contains additional definitions, the scope of the reinsurance coverage is circumscribed by those definitions, which may have the effect of making it narrower than that of the direct insurance (see Aegis Electrical and Gas International Services Co Ltd v Continental Cas Co [2008] Lloyd’s Rep IR 17). Similarly, where the contract of reinsurance contains an express term which has no counterpart in the underlying insurance policy, that reinsurance term cannot be ignored in order to achieve matching cover (GE Reins Corp v New Hampshire Ins [2004] Lloyd’s Rep IR 404).

C35     Article 6.1.1 as a whole also addresses the effect of variations in the incorporated terms in the contract of reinsurance compared to the equivalent term in the underlying insurance contract. If there are significant differences, the combined effect of paragraphs (1)(b) and (3) is that the relevant term from the underlying insurance contract has been excluded from the incorporated terms, and the express term in the contract of reinsurance prevails. For example, if the contract of reinsurance incorporates the terms of the underlying insurance contract with the method described in paragraph (1)(a) but also contains express terms that define the loss and expenses that count towards the deductibles, those express terms prevail (for a similar conclusion, see Allianz Australia Ins Ltd v Gen Cologne Re Australia Ltd [2004] NSWCA 433).

C36     Where the variations are small, there may be room for debate as to whether matching cover or something less than matching cover was intended. For example, in Tokio Marine Europe Ins Ltd v Novae Corporate Underwriting Ltd [2013] EWHC 3362 (Comm) the underlying insurance cover was for property damage and business interruption losses and imposed a per “Occurrence” deductible. The term “Occurrence” was defined as meaning “any one Occurrence or any series of Occurrences consequent upon or attributable to one source or original cause”. The retrocession agreement was stated to be written on “the same terms, clauses and conditions as original” and it followed “Original Policy Wording” but referred to “Loss Occurrence” and not simply “Occurrence”. Novae thus argued that the use of the additional word “Loss” showed that the definition of “Occurrence” in the direct policy was not to be incorporated into the retrocession agreement and accordingly that there was a per loss deductible, rather than an aggregated deductible, under the retrocession agreement. The court rejected this argument, noting that it had not been suggested by Novae that “Loss Occurrence” meant anything different from “Occurrence”, and that the addition of the word “Loss” was not to be regarded as having any significance to the operation of the deductible clause. The consequent radical mismatch of cover argued for by Novae in the context of otherwise identically worded contracts required much clearer wording than the addition of the superfluous single word “Loss”.

C37     Parties can avoid this type of dispute by using clear express wording in the contract of reinsurance. The approach of the Principles to variations in the wording of equivalent terms in the underlying insurance contract and the contract of reinsurance is to ascertain whether an express term conflicts with an incorporated matching term, in which case the former would prevail (paragraph (3)). In ascertaining whether there is a conflict, regard must be had to the interpretation rules in Article 6.1.3.

C38     The extent to which incorporated matching terms can take effect in the contract of reinsurance also needs to be considered in light of potential conflicts between incorporated matching terms and incorporated PRICL provisions that take effect as contractual terms. Under Article 1.1.1, the parties may agree that PRICL provisions are incorporated into their contract of reinsurance (see Comments 9 et seq. to Article 1.1.1). Article 1.1.3 acknowledges that the parties may exclude the application of or derogate from or vary the effect of any of the provisions of the Principles, whilst paragraph (3) acknowledges that the parties may agree to limit the extent of the matching cover and that express terms in the contract of reinsurance will prevail over incorporated matching terms from the underlying contract of insurance. Inconsistencies between incorporated PRICL provisions and incorporated terms from the underlying insurance contract would be resolved as follows:

-       Where an incorporated matching term conflicts with any of the PRICL provisions that have been incorporated as a whole (or nearly full set) in the contract of reinsurance, the former will prevail on the grounds that (1) the parties have impliedly chosen to exclude or modify a part of the Principles by incorporating the terms of the underlying insurance contract, and (2) the Principles operate as a default regime (Article 1.1.3);

-       Where an incorporated matching term conflicts with an individual PRICL provision that has been incorporated (either by copy-pasting into the contract of reinsurance or by expressly referencing the article number or heading) but where the Principles have not been incorporated as a whole, the latter will prevail on the grounds that (1) the parties have agreed expressly or impliedly to exclude a particular element of the scope, or limit the extent, of the matching cover under the contract of reinsurance, and (2) an express provision (the named PRICL provision) prevails over an incorporated matching term, under Article 6.1.1(3).

-       Where an express term in the contract of reinsurance that is identical, or identical in substance, to any of the terms of the underlying insurance contract (as described in paragraph (1)(b)) conflicts with any of the PRICL provisions that have been incorporated as a whole set (or nearly full set) in the contract of reinsurance, the former will prevail on the grounds that (1) the parties have expressly chosen to exclude or modify a part of the Principles by incorporating a specific term from the underlying insurance contract, and (2) the Principles operate as a default regime (Article 1.1.3); and

-       Where an express term in the contract of reinsurance that is identical, or identical in substance, to any of the terms of the underlying insurance contract (as described in Article 6.1.1(1)(b)) conflicts with an individual PRICL provision that has been incorporated (either by copy-pasting into the contract of reinsurance or by expressly referencing the article number or heading) but where the Principles have not been incorporated as a whole, it is a matter of construction as to which term the parties intended to prevail. In the absence of any other evidence as to the intention of the parties, the express term in the contract of reinsurance that is identical, or identical in substance, to any of the terms of the underlying insurance contract (as described in subparagraph (b)) should prevail according to the principle that a special provision prevails over a general provision.