1.          Relationship to the PICC

C1        Article 1.12(1), (2) PICC provides a rule on the computation of time set by parties. However, this rule is not suitable for application to the reinsurance period. For example, Article 1.12(2) PICC provides for an extension of performance periods where the last day falls on an official holiday. The reinsurance period is concerned with when the reinsurer is on risk, not the timing of performance. Holidays do not interrupt or suspend the reinsurance period. Moreover, with regard to time zones, Article 1.12(3) PICC states only that the relevant time zone shall be “that of the place of business of the party setting the time, unless the circumstances indicate otherwise”. However, the reinsurance period is not set by one party. For these reasons, Article 7.1 replaces these PICC rules.

2.          Reinsurance period and contract period

a.          Reinsurance period

C2        Within the PRICL framework, the term “reinsurance period” defines the period of time during which the reinsurer is “on the risk”, i.e. the period during which losses must occur, claims must be made or risks must attach, in order to fall within the temporal scope of the contract of reinsurance (see Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [38] (Mance LJ)). The method (“losses occurring”, “claims made” or “risk attaching”) that is applied depends on the criterion for loss allocation chosen by the parties (see Chapter 4). See also O’Neill, Woloniecki & Arnold-Dwyer, 5-126–5-130.

C3        It is important to note that the expiration of the reinsurance period does not limit the reinsurer’s liability with regard to – depending on the trigger – losses that occurred, claims that were made or risks that attached during the reinsurance period. In relation to “risk attaching” policies, this means that liability may only arise long after the reinsurance policy has expired (O’Neill, Woloniecki & Arnold-Dwyer 3-048 and 5-129). For the reinsurance period in “risk attaching” policies, the decisive factor is not the time at which claims materialize but that the risk attaches during the reinsurance period. Some “risk attaching” contracts of reinsurance contain long-stop dates that exclude liability for risks attaching during the reinsurance period but where the loss has not materialized by that date. If the contract of reinsurance contains a long-stop date, the period from the time at which the risk attaches to the date of the long-stop date may be referred to as a “liability period” (Gerathewohl 726 et seq.), which is conceptually different to the reinsurance period. Naturally, both periods must be distinguished from the period of time it takes to settle claims under the contract of reinsurance. 

b.          Contract period

C4        The reinsurance period must be distinguished from the contract period. The contract period describes the period during which the contract of reinsurance is in force. It spans from the date of formation of the contract of reinsurance to the date of its termination. The reinsurance period and the contract period will often overlap but may also vary because the contract period starts at the date of the formation of the contract, while the commencement date of the reinsurance period can be a different date chosen by the parties. The parties to the contract of reinsurance may wish to align the reinsurance period to the temporal scope of the underlying insurance contract or contracts, depending on the type of reinsurance in question. When dealing with facultative reinsurance, for example, the contract of reinsurance is frequently arranged to align to the period during which risks can attach pursuant to the underlying insurance contract. In contrast, in the case of treaty reinsurance, the reinsurance period is set for a fixed period (e.g. 12 months) that is independent of the various primary insurance periods.

C5        It is important to note that even where back-to-back coverage is intended and the terms of the underlying insurance contract are incorporated by reference (see Chapter 6, Section 1), doing so cannot override an express term setting out the reinsurance period as the temporal limitation of the contract of reinsurance (see Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [16] (Brown LJ); Municipal Mutual Ins Ltd v Sea Ins Co Ltd [1998] (CA) Lloyd’s Law Rep IR 421, 435 (Hobhouse LJ) and see Comment 30 to Article 4.2 , Article 6.1.1(3) and Comment 29 to Article 6.1.1).

3.          Reinsurance period and uncertainties regarding its determination

C6        Generally, the reinsurance period is a matter that is “basic and clear” (Municipal Mutual Ins Ltd v Sea Ins Co Ltd [1998] Lloyd’s Rep IR 421, 435 et seq. (Hobhouse LJ)). The parties to the contract of reinsurance usually set a commencement date as well as an end date, thus defining the reinsurance period. The period may vary according to the type of reinsurance written and regional reinsurance practice: whereas many contracts written for 12 months will run from 1 January to 31 December, others have different commencement and end dates. For the purpose of this Chapter, the “reinsurance period” refers to both the initial period of cover specified in the contract (e.g. 12 months) and the subsequent period of cover (usually of the same length) under continuous contracts following an individual or automatic renewal on the anniversary date of the contract (see Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [117] (Collins of Mapesbury LJ)). However, contracts of reinsurance do not always describe the reinsurance period with the necessary detail: for example, reinsurance period provisions frequently specify neither the exact hours for the commencement and end date nor the relevant time zone (see e.g. Caudle v Sharp [1995] CLC 642 (CA) 645 (Evans LJ); Municipal Mutual Ins Ltd v Sea Ins Co Ltd [1998] (CA) Lloyd’s Law Rep IR 421 (Hobhouse LJ)). The parties to a contract of reinsurance may therefore face uncertainties. For instance, disputes may arise regarding the applicable time zone where a contract of reinsurance written on a losses occurring basis relates to insurance contracts covering property damage in different time zones (see Wasa International Ins Co Ltd v Lexington Ins Co [2009] UKHL 40 [50] (Mance LJ) and [109] (Collins of Mapesbury LJ)).

C7        In the absence of a uniform rule, national contract law will govern the determination of the reinsurance period (see Gerathewohl 725 et seq., 900). Depending on the law applicable to the contract of reinsurance pursuant to either the parties’ choice of law or the conflicts rules, the method may vary: while some jurisdictions do not count the first day towards the period, others do not necessarily include the last day of a 12-month period (see Gerathewohl 726, 900, and § 188(2), § 187(2) BGB (German Civil Code)). This may lead to misunderstandings between the parties and inconsistencies where reinsurance is placed with several reinsurers from various jurisdictions.

C8        To create legal certainty regarding the temporal scope of a contract of reinsurance, Article 7.1 defines the reinsurance period and the relevant time zone for all types of contracts of reinsurance. It creates a uniform rule, thereby replacing the otherwise applicable national law. In addition, it creates uniformity between several subscribing reinsurers.

4.          Paragraph (2): Definition of the reinsurance period

C9        Paragraph (2) provides that the reinsurance period starts at 00:00 on the commencement date and ends at 24:00 on the end date. The rule implicitly reflects current market practice that the reinsurance period includes both the commencement and the end date (“both days inclusive”).

a.          Contract of reinsurance with links to several time zones

C10     Contracts of reinsurance are typically international contracts with links to several countries that may be located in different time zones. These links include:

-       the principal place of business of the reinsured or of the reinsurer;

-       the statutory seat of the reinsured or of the reinsurer;

-       the head office (central administration) of the reinsured or of the reinsurer;

-       the location of the risk or locations of several risks;

-       the place where the insured event occurs;

-       the place where a claim is made;

-       the place where the contract of reinsurance is formed; and

-       the place of performance.

C11     If there are links to several time zones, the question arises regarding which of these time zones is applicable to the hour of the start date and the hour of the end date of the reinsurance period. Frequently, therefore, the contract of reinsurance expressly provides for the application of a specific time zone.

b.          Determination by parties’ agreement

C12     The parties are free to agree on a time zone, or to specify one or more locations for determining the relevant time zone (see Article 1.1.3). In doing so, the parties may take into account the location indicated by the applicable basis of loss allocation: i.e. whether the contract of reinsurance covers risks attaching, losses occurring or claims made during the reinsurance period. If allocation is on a “losses occurring” basis, the location of the loss event could be chosen to be the relevant connecting factor for determining the relevant time zone. If, on the other hand, a contract of reinsurance operates on a “claims made” basis, the chosen time zone could be the that of the location where the claim is made. For a “risk attaching” contract, the parties may choose to apply the time zone of the place where the contract of reinsurance was formed. However, the parties could just as easily choose a geographical link that is unconnected to the allocation criterion, such as the principal place of business of a reinsurer or the reinsured.

c.          Paragraph (2): Default rule

C13     Given the multiple options, paragraph (2) provides a default rule where the contract of reinsurance is silent on the applicable time zone. The default rule applies irrespective of the type of contract of reinsurance and of which allocation criterion would otherwise be applicable under Chapter 4 of the Principles (loss allocation).

C14     Paragraph (2) establishes the applicable time zone in a uniform and predictable manner for all parties at the time of contract formation. The objective of the rule is to provide clarity and uniformity, thereby enhancing legal certainty.

C15     Paragraph (2) designates the reinsured’s head office as the point of reference for determining the applicable time zone. An insurer’s head office is a well-established concept commonly used for regulatory purposes, notably in the IAIS’s Insurance Core Principles (ICPs), by the EU in Solvency II (Directive 2009/138/EC), in the UK Prudential Regulation Authority Rulebook Solvency II Firms, Insurance General Application, Rule 2.2, and in US statutes governing jurisdiction and venue. The terms “headquarters” and “main office” commonly used in the US would be understood to be equivalents to “head office”. Given the familiarity of the term, the head office of the reinsured should be easily ascertainable.

C16     Conversely, alternative links may introduce uncertainty. For example, if the time zone were linked to the place of contract formation, Article 2.1.6(2) PICC would designate the location where the offeror received the declaration of acceptance. It is not always evident which party is the offeror and which the offeree. Consequently, this ambiguity can result in different interpretations as to whether the relevant location is that of the reinsured, a reinsurer, or indeed the branch or acting office of either that receives the communication.

C17     Similarly, linking the time zone to the location where a claim is made also could introduce uncertainty and produce unpredictable outcomes. When a claim is made by letter, electronic means or telephone, it is unclear whether the relevant location is that of the claimant (insured) or of the insurer (reinsured) receiving the claim. Moreover, the location of the claimant at the time that the claim is made may be fortuitous or subject to manipulation.

C18     The location of the risk may be equally difficult to determine. EU insurance law defines the location of the risk in Article 13(13) of Solvency II (Directive 2009/138/EC). In the context of life insurance, EU insurance law does not refer to the location of the risk, but to the Member State of the commitment, as defined in Article 13(14) of Solvency II (Directive 2009/138/EC). Under Article 13(13) and (14), the habitual place of residence of the policyholder will be decisive in most cases. However, different rules apply when insurance of immovable property, registered vehicles or short-term travel risks are concerned. Apart from the complexity of the definition in EU law, no analogous global definition exists. The concept of the risk’s location may therefore cause substantial debate. It is also unworkable where the insurance cover involves multiple risks located in different time zones.

C19     The location of a loss occurrence could be determined more easily – and could therefore serve as a suitable alternative to the reinsured’s head office – but it lacks predictability for the reasons explained in the Comment below.

d.          Predictability of the exact start and end time

C20     The head office of the reinsured is known to, or easily ascertainable by, all parties involved. Given that the reinsured’s head office is determined at the time of contract formation, the location is also permanently fixed for the purposes of contract interpretation, and the parties will know from the outset which time zone applies. In contrast, where the time zone is linked to the place of loss occurrence or claim notification, it is unclear a priori in which time zone the relevant event will occur. The precise duration of the reinsurance period would therefore not be ascertainable at the time of contract formation but would instead depend on fortuitous circumstances arising during the reinsurance period.

C21     Designation of the reinsured’s head office as the point of reference ensures that all losses are allocated to a single time zone. In contrast, if the time zone is linked to the place of loss occurrence, it is conceivable that a loss could span multiple time zones (e.g. a natural disaster causing damage across several time zones). This effect would be particularly pronounced if a disaster were to extend geographically across the International Date Line.

Illustrations

I1.         Reinsured A operating throughout the US with its head office in California (Pacific Time Zone (PT)) is affected by an earthquake in Texas, which extends from the Central Time Zone (CT) into the Mountain Time Zone (MT). Due to the time difference, losses in the western part of Texas may still be insured (loss occurrence at 23:30 MT on 31 December), while those in the eastern part are not (loss occurrence at 00:30 CT on 1 January). However, both losses are treated equally according to the criterion of the head office of Reinsured A (in this case, both losses would be covered; loss occurrence at 22:30 PT on 31 December).

e.          The uniformity of the determination of the relevant time zone

C22     For reinsurance placed in the subscription market in particular, a time zone linked to the head office of the reinsured also has the additional advantage that it would apply to all subscribing reinsurers uniformly. Accordingly, Article 7.1 enables seamless and uniform renewal of the contracts of reinsurance entered into with all subscribing reinsurers, as the reinsurance period would end at the same time on the same date for each subscribing reinsurer. In contrast, a uniform and seamless renewal process would not be possible if the various head offices of the reinsurers were the determining factor. If the reinsurers maintained their head offices in different time zones, different local times would effectively govern the commencement and end dates of the reinsurance period. Different renewal dates would apply within a single reinsurance programme. Moreover, if the reinsured does not renew a portion of the risk with one of the original subscribing reinsurers but instead reinsures it with a new subscribing reinsurer in a more westerly time zone, this could lead to a temporary gap in protection.