Reinsurance Principles in a Changing L egal Environment PRICL – Remedies

1. Reinsurance Principles in a Changing Legal Environment PRICL – Remedies 8th AIDA Europe Conference Lisbon, 3rd October 2019 Prof.Dr. Manfred Wandt Goethe-University, Frankfurt

2. Agenda • Duties at a Glance • General Remedies (Art. 3.1 PRICL) • Wording • Explanations • Specific Remedies (Art. 3.2 PRICL): Nondisclosure • Art. 3.2(1) PRICL: Terms and Conditions • Art. 3.2(2) PRICL: Higher Premium • Art. 3.2(3) PRICL: Avoidance • Art. 3.2(4) PRICL: Additional Damages • Final Remarks Prof. Dr. Manfred Wandt

3. I. Duties at a Glance – Structure • Remedies necessitate duties – dogmatic differentiation: Ch. 2 and 3 Chapter 2: Duties of the Reinsurer and the Reinsured • Section 1: General duties, particularly.utmost good faith and confidentiality • Section 2: Duty of only one contractual party: precontractual duty of the (prospective) reinsured • Section 3: Duties owed during the contract period: premium payment, contract documentation, right to inspect • Section 4: Duties owed during the claims process: notice of claims, claims handling by the reinsured (reasonable and prudent claims handling), follow-the-fortunes and follow-the-settlements, timely payment of reinsurance claims Prof. Dr. Manfred Wandt

4. II.1. General Remedies (Art. 3.1 PRICL) – Wording • Not every duty has its own remedy: Generally common remedies for specific duties (with one exception) • The remedies generally applicable to all duties are stipulated by Art. 3.1 PRICL stating: (1) If a party breaches the contract, an aggrieved party is entitled to claim (a) performance in accordance with Chapter 7 Section 2 PICC; (b) damages in accordance with Chapter 7 Section 4 PICC. (2) An aggrieved party may terminate the contract if it cannot reasonably be expected to uphold the contract. • What does that mean in detail? Prof. Dr. Manfred Wandt

5. II.2. General Remedies (Art. 3.1 PRICL) – Explanations • Remedies are reciprocal, i.e., both the reinsurer and the reinsured might be granted a remedy – depending on who breached a duty • Art. 3.1 PRICL entails breaches of any contractual duty • This technique ensures that no breach remains without a legal consequence • Art. 3.1 PRICL provides for classical instruments of contract law • The other party may always demand performance of the contract and damages (provided that there is damage) • Both remedies are extensively described by the PICC (e.g. as for the definition of damage) whereas the PRICL generally refer to the PICC • Only where the other party cannot be expected to uphold the contract, a right to terminate (for the future) will be granted by Art. 3.1(2) PRICL • General Guideline: Upholding the contract Prof. Dr. Manfred Wandt

6. III. Specific Remedies (Art. 3.2 PRICL): Nondisclosure • By contrast, the remedies of Art. 3.2 PRICL are not reciprocal • Art. 3.2 PRICL only entails breaches of the precontractual duty of disclosure of the reinsured as provided by Art. 2.2.1 PRICL stating: • In seeking reinsurance cover, a prospective reinsured shall provide the reinsurer with all information of which it is or reasonably ought to be aware and which is material to the risks to be assumed by the reinsurer. Information is material to a risk if the information is of the type that would affect a reasonable and prudent reinsurer’s decision as to whether to accept the risk and if so under which terms and conditions and for which premium. • Only where the reinsured breaches this duty, Art. 3.2 PRICL • All other scenarios are exclusively covered by Art. 3.1 PRICL (e.g. a breach of a disclosure duty by the reinsured during the contract or even a breach of a disclosure duty by the reinsurer originating from utmost good faith) Prof. Dr. Manfred Wandt

7. III. Specific Remedies (Art. 3.2 PRICL): Nondisclosure • Art. 3.2 PRICL displaces the general remedies of Art. 3.1 by precisely tailored remedies which are proportionate to the significance of the duty of disclosure • It reflects modern developments in primary insurance and reinsurance • Again, the reinsurance contract shall generally be uphold • Accordingly, the favoured legal consequence is an adjustment of the reinsurance contract • A remedy of avoidance is granted but has to meet high measures and remains a remedy of last resort • All legal consequences of Art. 3.2 PRICL are dominated by the prequestion under which conditions the reinsurer would have concluded the contract if it had known the undisclosed information (Art. 2.2.1) at the time of conclusion of the contract. • These settings lead to a detailed differentiated approach: Prof. Dr. Manfred Wandt

8. III.1. Specific Remedy (Art. 3.2(1) PRICL): Terms and Conditions • Art. 3.2(1) PRICL reads: If the prospective reinsured breaches its duty of disclosure as set forth in Article 2.2.1 and if the reinsurer, had it known the undisclosed information, would have entered into the contract on different terms and conditions other than the premium, the reinsurer is entitled to retroactively adjust the contract to these different terms and conditions. • The first scenario entitles the reinsurer to adjust the contract the the terms and conditions it had introduced to the contract had it known the undisclosed fact • Terms and conditions mean, e.g., an exclusion clause which would have excluded a specific high-potential risk • Upon exercise of the remedy, the contract will be deemed to have been agreed upon on these different terms and conditions Prof. Dr. Manfred Wandt

9. III.2. Specific Remedy (Art. 3.2(2) PRICL): Higher Premium • Art. 3.2(2) PRICL reads: Subject to paragraph (1), if the prospective reinsured breaches its duty of disclosure as set forth in Article 2.2.1 and if the reinsurer, had it known the undisclosed information, would have entered into the contract on a higher premium, the reinsurer is entitled to […]. • In the scenario of the introduction of a higher premium a retroactive adjustment of the premium will not be in line with the interests of the reinsurer • If this scenario were governed by paragraph (1), the reinsured would not have incentive to fully and properly disclose in accordance with Art. 2.2.1 PRICL • Hence, a reinsured would not have to fear consequences out of its breach of the precontractual duty of disclosure • Therefore, it is necessary to provide for a noticeable sanction that controls the behaviour of the reinsured whilst upholding the contract Prof. Dr. Manfred Wandt

10. III.2. Specific Remedy (Art. 3.2(2) PRICL): Higher Premium • Therefore, differentiation in time: Art. 3.2(2) PRICL continues: […] (a) proportionally reduce the amount to be paid on any claim arising from a loss that occurred before the reinsurer became aware of the breach and (b) claim the higher premium for the remaining contract period while providing full coverage according to the adjusted con-tract for all claims arising from a loss that occurred after the rein-surer became aware of the breach. […] • The reinsurer is entitled to reduce the amount to be paid on any claim (sanction for the past, Art. 3.2(2)(a)) • Additionally, the reinsurer is entitled to adjusted the premium for the contractual period remaining (adjustment for the future, Art. 3.2(2)(b)) • Consequently, the reinsurer would have to grant full cover for the future against payment of the pro rata increased premium Prof. Dr. Manfred Wandt

11. III.2. Specific Remedy (Art. 3.2(2) PRICL): Higher Premium • In order to also properly value the interest of the reinsured in keeping the extent of its reinsurance cover for yet undiscovered claims, Art. 3.2(2) provides for a counterclaim of the reinsured: […] If the reinsured notifies the reinsurer, within reasonable time after the adjustment, it is entitled to pay the higher premium retroactively to the formation of the contract and to full coverage for losses of which it was not aware prior to notification. • This counterclaim of the primary insurer is an innovative solution of the PRICL, which goes beyond the possibilities under the UK Insurance Act 2015 • Still, this counterclaim does not enable the cover of claims that occurred before the reinsurer became aware of the breach and of which the primary insured had knowledge (Art. 3.2(2) last sentence) Prof. Dr. Manfred Wandt

12. III.3. Specific Remedy (Art. 3.2(3) PRICL): Avoidance • Only in rare circumstances, the reinsurer will also be entitled to avoid the contract, Art. 3.2(3) PRICL: (3) A breach of the duty of disclosure as set forth in Article 2.2.1 by the prospective reinsured entitles the reinsurer to avoid the contract retroactively if (a) the duty was breached fraudulently, or (b) the reinsurer would not have entered into the contract at all had it known the undisclosed information. • Where the duty was breached fraudulently, the reinsurer cannot be expected to uphold a contract with a untrustworthy partner; the second scenario is the consequence when comparing actual and desired status • The remedy is restricted to only these two scenarios (other than the UK Insurance Act 2015) • By contrast to Art. 3.1 PRICL, the avoidance has retroactive effect Prof. Dr. Manfred Wandt

13. III.4. Specific Remedy (Art. 3.2(4) PRICL): Additional Damages • In order to entail all materialized disadvantages the reinsurer might have suffered out of the breach of the duty of disclosure, Art. 3.2(4) PRICL complements this differentiated solution: (4) If the reinsurer exercises a remedy pursuant to paragraphs (1) to (3), it may claim additional damages. • This remedy entails all damage that have not already been balanced by the adjustment or the avoidance • E.g., the reinsurer may have incurred costs when negotiating the contract and these losses cannot be recovered by avoidance; the reinsurer adjusts the premium pursuant to paragraph (2)(b). For that purpose it has to re-evaluate the risk which may require the reinsurer to incur costs. • Yet, it necessitates that one of the provided remedies has been exercised and cannot be claimed as a standalone remedy Prof. Dr. Manfred Wandt

14. Thank you very much for your kind attention Prof. Dr. Manfred Wandt

15. IV. Final Remarks • A • A • A Prof. Dr. Manfred Wandt