1.          Introduction

C1        This provision is concerned with the situation in which the underlying risk run by the reinsured has been modified by the reinsured after the formation of the contract of reinsurance. This envisages that either the modification is contractually agreed between the underlying insured and insurer or the insurer uses a contractual power to impose a modification unilaterally. The Principles use the term “modification” – instead of “variation” – to adhere to the terminology used in the PICC. The general principle under paragraph (1) is that such modifications are not binding on the reinsurer, subject to the specific “consent” exceptions in paragraph (2). This provision does not apply to any change in national law which has an impact on the cover under the underlying insurance contract. If there is any change in the law affecting the underlying insurance contract, that risk is borne by the reinsurers in accordance with the follow-the-fortune principle as set out in Article 2.4.3(b).

2.          Paragraph (1): Original matching terms upon contractual modification after formation

C2        Paragraph (1) provides that a term in the underlying insurance contract that has been modified after the formation of the contract of reinsurance does not become an incorporated matching 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. Paragraph (1) removes the argument that the words of incorporation may operate to modify the contract of reinsurance along with the insurance contract so that matching coverage remains in place (albeit not on the original, but the modified, terms). Paragraph (1) also removes the argument that a material modification of the underlying insurance contract terminates, or discharges a reinsurer’s liability under, a contract of reinsurance that provides cover on terms “as original”. That was the position at common law prior to the UK Insurance Act 2015: Norwich Union Fire Ins Society v Colonial Mutual Fire Ins Co Ltd [1922] 2 KB 461 and The Lower Rhine and Württemberg Ins Association v Sedgwick [1899] 1 QB 179. In The Lower Rhine decision, the English Court of Appeal held that the “Original Policy” referred to in the reinsurance policy was intended to mean the policies in existence at the time the contract of reinsurance was entered into, and the effect of the words “Subject to same terms as Original Policy” was that the liability of the reinsurer did not cover losses which would be incurred by the reinsured under a policy not containing the same terms, clauses and conditions as the (modified) underlying policy of insurance.

C3        It is of course open to the reinsurer to agree that it will be bound by changes to the underlying risk, either in the contract of reinsurance itself or by a subsequent modification at the time of, or shortly after the modification of the insurance policy. The Principles contemplate two specific situations in which the reinsurer becomes bound by such modifications, as set forth in paragraph (2)(a) and (b).

3.          Paragraph (2): Subsequent modifications to incorporated matching terms

C4        Subparagraph (a) addresses the situation where, from its formation, the contract of reinsurance envisages subsequent modifications to the incorporated matching terms in the insurance contract and provides that any modified term in the underlying insurance contract that falls within Article 6.1.1(2) will be automatically incorporated into the contract of reinsurance upon such modification. In effect, the reinsurer gives its advance permission to future modifications at the time of entering into the contract of reinsurance. This type of consent must either be by way of an express term in the contract of reinsurance, or there must be clear evidence that the reinsurer’s consent forms part of the agreement in any other way. It is not enough to use “as original” wording and to rely on terms in the underlying insurance contract that anticipate modifications. It was held in American International Marine Agency of New York Inc v Dandridge [2005] Lloyd’s Rep IR 643 that a leading underwriter clause in the underlying policy, permitting the leading underwriter to vary the risk for all subscribers, was not incorporated into the contract of reinsurance so as to incorporate into the contract of reinsurance the modified terms of the underlying insurance contract which post-dated the formation of the contract of reinsurance.

C5        Subparagraph (b) addresses the situation where the modification of the terms in the underlying insurance contract has already been agreed, or is about to be agreed, between the insured and the reinsured. The provision assumes that the reinsured obtains the reinsurer’s consent to the modification so that those changes will travel across to the contract of reinsurance: i.e. the reinsurer agrees that the modified terms will be incorporated into the contract of reinsurance, replacing any inconsistent originally incorporated terms. Paragraph (2)(b) neither requires the reinsurer to consent to the modified terms nor compels the reinsurer to accept an invitation to negotiate the modification of the terms of the contract of reinsurance. The reinsurer may make its consent to the modification conditional upon the payment of an additional premium.

4.          Paragraph (3): Date of effect of modification

C6        Paragraph (3) envisages that the modification of terms of the contract of reinsurance will take effect from the same date the corresponding modification in the underlying insurance contract took effect so that matching cover is maintained without any temporal gaps. Unless the parties otherwise agree, the modification has no retrospective effect going back to the formation of the contract of reinsurance. Further to paragraph (3), the date on which the modification takes effect may precede the date of the consent given under paragraph (2)(b).