Are reinsurance wordings worth the paper they are written on?

Katia Puras, Wordings Manager and Legal Counsel, explains why the legal events that followed the 9/11 attacks are an excellent example for why wordings play such an important role in the reinsurance process.

Are reinsurance wordings worth the paper they are written on? Just ask an underwriter who has been put on the stand to give a statement as to what her actual intent was when underwriting a certain risk, often many years after the event. Talk to a claims professional who has been tasked with the difficult mission of establishing whether a very complicated and nuanced claim was covered or excluded based on poorly drafted wordings. Or, consider a cedant company which has been unable to recover from its reinsurer after a major catastrophic event, simply because the reinsurance wordings did not support the claims aggregation they thought they bought cover for. If these examples feel like déjà vu to you, unfortunately, you are not alone. A number of reinsurance disputes have arisen in the past due to poorly drafted wordings – and sometimes even the complete absence of it.

One of the most disputed issues in treaty reinsurance wordings, and whose clauses are often heavily debated, is the aggregation of claims. And, one of the most notorious examples of this, is the tragic attacks on the World Trade Centre (WTC). The legal events that followed serve as an excellent example as to why reinsurance wordings are a lot more than a simple piece of paper with a bunch of words on it. It’s what insurers and reinsurers are actually selling or buying. This case study is important as it highlights not only the impact to the reinsurers, brokers and organisations, but it also reminds us to consider the flow on effects to the individuals involved.

WTC aggregation disputes

In World Trade Centre Properties et al v Hartford Fire Insurance Company et al, the dispute arose between the leaseholder of the WTC complex, its insurers and their reinsurers in the US courts, with the main issue being whether the events of 9/11 constituted one or two occurrences. The answer would determine whether the insured could recover either US$3.5 billion or US$7 billion under the insurance coverage placed with about two dozen insurers. This lengthy litigation took over 10 years and ended up in two different decisions: one against a set of insurers determining that there was one occurrence and the other (against another set of insurers) determining that there were two occurrences. The main reason for the different outcomes in the litigation was the policy wording. The insurers either had different definitions of occurrence or did not have a definition at all.

WTC aggregation disputes also hit the UK courts where the courts also reached two different conclusions. In Aioi Nissay Dowa v. Heraldglen & Ors, the dispute involved the reinsurance of liability policies issued to the two airlines whose planes were hijacked and the security companies who handled their check-ins. The reinsurance wording provided that the term "each and every loss" meant "each and every loss or accident or occurrence or series thereof arising out of one event". A London arbitration tribunal found in favour of the reinsured and determined that the terrorist attacks to the Twin Towers were two events rather than one. The arbitral tribunal took the view that the facts that are regarded as having a bearing on the final conclusion as to whether there was one event or two "have to be considered in the round and in the context of the particular contractual wording and the overall contractual purpose". The reinsurers appealed against this decision and the English court upheld the arbitrator’s decision.

In Simmons v Gammell, a different conclusion was reached. The dispute centered on whether or not claims made against the Port of New York following the attacks on the WTC were to be aggregated based on the proper construction of the phrase "arising from one event". The reinsurance wording stated that reinsurers would provide cover for each and every loss in excess of US$1 million, with "loss" being defined as "loss, damage, liability or expense or a series thereof arising from one event".

The Port was sued in around 10,000 respiratory claims by individuals involved in the rescue and recovery operations, debris removal, and evidence gathering at and around the site following the attacks. It was alleged that the Port had failed to provide adequate protective equipment or adequate training.

The reinsured submitted that the respiratory claims and the attacks were sufficiently linked to amount to loss "arising from one event" and so the claims could be aggregated together. The reinsurers argued that the negligence of the Port constituted a "continuing state of affairs" rather than a single "event" and therefore could not be aggregated. The dispute went to arbitration and the arbitrators found in favour of the reinsured. The case was appealed to the English court and was dismissed.

In conclusion

The lesson to be learned from these cases is clear: the reinsurance wordings are a fundamental part of the underwriting process and should be scrutinised very carefully to ensure they accurately reflect the parties’ intent at the time of underwriting. This is becoming even more relevant in this ever-changing and increasingly regulated market.

Contracts specialists should be arm in arm with underwriters and brokers in the reinsurance process. Not only can this help those involved avoid lengthy and costly legal disputes, it can also ensure that those at the end of the reinsurance distribution chain get the support they need. At Hiscox Re & ILS, our contract specialists work closely with the underwriting team and brokers, not only to ensure the parties’ commercial intentions are adequately addressed within the contract but also in the development of innovative and bespoke products to meet our clients’ needs.

The reinsurance market has gone a long way in the past few years in paying more attention to reinsurance wordings, but there is still more work to do. So, are reinsurance wordings worth the paper they are written on? Yes, they are!