Run-Up to Renewals: How important is choice of law in reinsurance contracts? And why choose English law?

Reinsurance counterparties will often default to English law as it has a robust corpus of reinsurance-specific precedent jurisprudence. But there can sometimes be push-back from reinsureds.

For example, a captive, or its parent, may feel more comfortable having a law with which they are more familiar and so will push for the law of their home country. Similarly, on multinational programmes, with entities being covered in multiple jurisdictions, each entity may wish to opt for the law of its own country. Fronting partners, too, may push for local law and jurisdiction.

Underlying insurance contracts may of course also be written subject to a range of local legal systems. The argument is then run that the cover should match, so that the local law applies at the reinsurance or retrocession level as well. The issue deserves careful consideration; choice of law matters at each stage of the reinsurance chain of contracts.

Discrepancies between legal systems can cause challenges to the assumed operation of cover. Reinsurance counterparties need to consider the legal risks carefully where the underlying insurance contract is subject to an unfamiliar legal system. And if the reinsurance or retrocession is so subject, there can be even more unpredictable results, even if the dispute is heard before an English court or London-seated tribunal (jurisdiction). Lack of consideration over governing law in the contractual chain, and its potential effects, can lead to costly and time-consuming disputes.

The English common law and reinsurance

There are sound reasons many reinsurance counterparties choose English law to govern their contracts. English insurance law has been steadily developing since the 18^th Century, with the result that many of the main historical issues giving rise to disputes between reinsurers and reinsureds have been considered and resolved. This affords a degree of certainty to the parties as to the operation of cover and how issues will be treated in the event of any disagreement.

By contrast, many other systems of law have yet to grapple with many (or any) reinsurance issues. It is not uncommon for there to be no reinsurance law at all in a particular country.

Where there is a civil code in place (as is common in European and Latin American countries), the code may cover only insurance, and not reinsurance-specific issues. Many insurance legal codes can be pro-insured in nature, as a means of protecting policyholders, but this imbalance can be inapposite for a contract between two sophisticated insurance companies. In many jurisdictions, courts cannot create binding law and precedent, but rely on and apply the relevant codes, without being bound by earlier decisions on the same point. As a result, the same point may be re-litigated, leading to conflicting decisions and uncertainty.

There is another reason for opting for English law: the presumption that cover is “back to back”. English law generally assumes that, in the absence of clear wording to the contrary, a reinsured intends to have its liability matched by the reinsurer. There are nuances to this. We will examine the nature of back-to-back cover in more detail in the next article in our series and whether it applies in all circumstances.

Conclusion

The choice of governing law for your reinsurance contract is crucial. Selecting a law which is unclear on key reinsurance principles will increase the chances of a dispute further down the line. As with other legal systems with a settled body of reinsurance law, English law can provide greater certainty as to how the reinsurance cover should function.