In brief - Express provisions are best way to secure inspection rights

Reinsurers can gain clarity through the process of inspecting the books and records of their reinsureds. Securing this right should be done through an express inspection clause which, if it includes such things as rights to copy, clear and unequivocal reservation of rights, and clear definitions of materials to be inspected, may help to minimise future disputes.

Inspection rights grant reinsurers details about claims and reinsureds

The right of inspection gives reinsurers an exercisable right over their reinsureds to inspect their relevant books and records.

Ensuring the existence of inspection rights is necessary for reinsurers because they are one step removed from the claims process. Safeguarding the right of inspection for retrocessionaires is just as critical. Inspection rights are necessary in both facultative and treaty reinsurance.

Without an inspection right reinsurers can be "left in the dark" as to the claims they are required to settle or indemnify.

The right permits the reinsurer to obtain details regarding the original claim(s) triggering the reinsurance, and the reinsured's underwriting practices, claims handling and reversing methods.

Inspection clause may be express or implied in contract

In Australia, reinsurance contracts are specifically excluded from the Insurance Contracts Act 1984 under section 9. This means that the common law of contract applies.

The right of inspection is a contractual right arising in the reinsurance contract.

Inspection rights may arise in two ways:

  1. Express inspection clause – expressly providing for inspection rights is a common, and preferable, method of securing the right, for example:
In the event of a claim arising all papers in connection therewith shall be at the command of the Reinsurers on this reinsurance or parties designated by them for inspection
(See Pacific & General Insurance Co Ltd (in liq) v Baltica Insurance Co (UK) Ltd [1996] LRLR 8)
  1. Implied inspection clause – the right may be implied into a reinsurance treaty (barring any express term to the contrary).
(See Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep 599; Charman v Guardian Royal Exchange Assurance Plc [1992] 2 Lloyd's Rep 607)

Reinsurers should be cautious when relying on an implied right as it must be proved, and its existence under the law remains unsettled. Some judges have held that the right of inspection is a matter of commercial negotiation and must be expressly provided for. (See Societe Anonyme d'Intermediaries Luxembourgeois v Farex & Others [1995] LRLR 116 (CA))

Express inspection clause may help to minimise future disputes

Inspection rights should be provided for by way of an express provision in the reinsurance treaty or contract rather than relying on an implied term. In the interests of minimising future disputes, express provisions should be considered for:

  • The right to copy (as opposed to just inspect) materials.
  • A clear definition of the scope of the "books" and/or "records" to be inspected.
  • A clear and unequivocal reservation of rights when carrying out an inspection.
  • A provision to allow for a third party/independent specialist firm to undertake the inspection (as opposed to the reinsurer itself carrying it out).
  • Whether the right of inspection survives termination of the reinsurance contract.
  • The right to conduct an audit (when necessary).
  • A system of informal dispute resolution.
  • A process for facilitating inspection within a reasonable timeframe.

Confidentiality agreements, retainers among ways to ensure cooperation

Commercially, both reinsurer and reinsured will wish to preserve goodwill. This may require a reinsurer to take steps such as:

  • signing a confidentiality agreement prior to inspection, to prevent the reinsurer divulging the findings of its inspection to third parties (including any co-reinsurers)
  • entering into a retainer with the reinsured's lawyers to preserve any legal professional privilege over contentious parts of any file
  • providing the reinsured with an explanation of why it is exercising the right of inspection (although a reinsurer is not obliged to do so)
  • resolving any disputes relating to the approval and/or facilitation of the inspection in an informal way

Reservation of rights important for reinsurers

Reinsurers should avoid prejudicing their legal position by always carrying out an inspection under a clear and unequivocal reservation of rights.

As inspection rights are governed by contract law, exercising the right to inspect the reinsured's books and records may amount to an election to affirm the existence of the reinsurance contract. (See Iron Trades Mutual Insurance Co Ltd v Companhia de Seguros Imperio [1991] 1 Re LR 213) This could mean that any right on the part of the reinsurer to avoid the contract has been waived.

If a without prejudice inspection cannot be agreed between the parties, and the reinsurer is in a position to possibly avoid the contract, the reinsurer should consider not inspecting.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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