A win for reinsurers - no back to back cover because of initial event sentence
- Whether an addendum to a treaty between the parties entitled RGA to deny liability for TPD claims that occurred prior to 1 July 2005;
- Whether reinsurance agreements were presumed "back to back".
On 23 June 2003 Metlife and RGA entered into a reinsurance treaty whereby RGA agreed to reinsure the liabilities Metlife had under group life insurance policies set out in appendix A to the treaty (the Appendix A Policies). The treaty had an effective date of 5 February 2003. In December 2005 Metlife and FSS Trustee Corporation (FSS) entered into a policy (the Blue Ribbon Policy that was not in appendix A to the treaty, which had a commencement date of 1 July 2005. Subsequently in December 2006 the parties agreed an addendum by which RGA agreed to reinsure the liabilities of Metlife to FSS under the Blue Ribbon policy, with effect from 1 July 2005. Metlife sought coverage with respect to approximately 250 total and permanent disablement claims that it had paid pursuant to the Blue Ribbon policy. RGA denied cover on the basis that the addendum contained an “initial event” sentence which meant that there was no automatic entitlement to cover if the initial event that had caused the TPD claim occurred prior to 1 July 2005. Metlife argued that there was a presumption for contracts of proportional reinsurance that the reinsurance was “back to back” with the underlying policy. Further, it argued that the initial event sentence was relevant only to automatic limits and could not be interpreted as a restriction on cover, as it had not been specifically worded in that manner.
The Decision at Trial
The court noted the general principle of construction that for a reinsurer to be liable to the reinsured, the loss must fall within the underlying contract, and the reinsured must be liable to its insured pursuant to the underlying policy.
In relation to the “back to back” argument, the court found that the addendum was not in fact back to back with the underlying policy as the language of the contract made it clear that this was not the parties’ intention. Taking into account the fact that Metlife acknowledged that the addendum was not in all respects back to back with the underlying policy, the court found that it could not overturn the clear intention of the parties based on a presumption, rather than a rule, of law.
In relation to the initial event sentence, the court noted that the interpretation of the wording of the sentence and the remainder of the policy was such that the initial event sentence did not require RGA to consider claims unless the initial event leading to or contributing to it, occurred after the date of effect of the treaty and that therefore the sentence operated as a condition of or exclusion from cover. For that reason, the court concluded that RGA had no automatic obligation to follow Metlife’s settlement decision. Despite placement of the initial event sentence in a section of the addendum relevant to claims handling limits, it was clearly concerned with applicability of coverage issues and not just claims assessment issues.
Implications For You
The decision highlights the principles of construction that courts will adopt in considering issues relevant to coverage in reinsurance. In particular, it is clear that the objective intention of the parties will prevail over a presumption, such as the presumption by Metlife in this instance that the cover was “back to back”. Care in drafting must, as usual, be taken to ensure that the intention of the parties is reflected in the terms of the agreement.