Examkin

Question

Difficulty: MediumReinsurance Concepts

Bayfront Properties purchases a 50millioncommercialpropertypolicyfromAtlanticMutualtocoveranewlyconstructedcoastalresort.Duetothehighconcentrationofhurricaneexposureinthissinglelocation,AtlanticMutualnegotiatesaspecific,individualagreementwithApexSurplustoassume50 million commercial property policy from Atlantic Mutual to cover a newly constructed coastal resort. Due to the high concentration of hurricane exposure in this single location, Atlantic Mutual negotiates a specific, individual agreement with Apex Surplus to assume 30 million of this exact risk. Months later, a catastrophic storm causes a total loss to the resort. Bayfront Properties, frustrated by perceived delays in the claims process, attempts to file a lawsuit demanding payment directly from Apex Surplus. Based on insurance principles, which of the following statements correctly evaluates this situation?

  1. The arrangement is a facultative reinsurance agreement, and Bayfront Properties has no legal standing to demand payment directly from Apex Surplus.Answer
  2. B
    The arrangement is a treaty reinsurance agreement, which automatically grants Bayfront Properties the right to collect a proportionate share of the loss from Apex Surplus.
  3. C
    The transaction represents risk avoidance, legally transferring all direct claims adjustment responsibilities and liabilities from Atlantic Mutual to Apex Surplus.
  4. D
    The arrangement is a facultative reinsurance agreement, but because the loss is catastrophic, Apex Surplus becomes directly liable to the original policyholder.

Answer

The arrangement is a facultative reinsurance agreement, and Bayfront Properties has no legal standing to demand payment directly from Apex Surplus.
The correct answer identifies two key principles: first, the reinsurance is facultative because it was negotiated specifically for one individual risk (the resort) rather than a broad class of policies. Second, under the doctrine of privity of contract, a reinsurer only owes an obligation to the ceding insurer. The original policyholder (Bayfront Properties) has no legal relationship with the reinsurer and therefore no standing to demand payment or sue them directly.

Step-by-Step Solution

1
Identify the type of reinsurance used in the scenario.
The agreement was negotiated specifically for a single risk (the $50 million coastal resort).
Agreements negotiated on a case-by-case, individual risk basis are classified as facultative reinsurance, not automatic treaty reinsurance.
2
Determine the legal relationship between the policyholder and the reinsurer.
There is no privity of contract between Bayfront Properties and Apex Surplus.
Reinsurance is a contract of indemnity strictly between the ceding insurer and the reinsurer. The original insured is not a party to this contract.
3
Evaluate the policyholder's right to sue the reinsurer.
Bayfront Properties cannot demand payment directly from Apex Surplus.
Because there is no direct legal contract between the policyholder and the reinsurer, the policyholder's only recourse is against the primary insurer (Atlantic Mutual).

Key Concept

Reinsurance Types and Privity of Contract
Rate this question

Topics

Reinsurance Concepts

More questions from this topic