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Difficulty: MediumReinsurance Concepts

Oakwood Insurance provides a 4millionprofessionalliabilitypolicytoanengineeringfirm.OakwoodhasastandingagreementwithGlobalRetoautomaticallytransfer604 million professional liability policy to an engineering firm. Oakwood has a standing agreement with Global Re to automatically transfer 60% of the risk and premium for every professional liability policy it issues. When the engineering firm faces a 1 million covered judgment, they discover Oakwood is experiencing administrative delays and attempt to file a claim directly with Global Re for $600,000. Under insurance principles, which of the following statements accurately identifies the type of reinsurance and the legal standing of the engineering firm's direct claim?

  1. Treaty reinsurance was utilized, and the engineering firm lacks the privity of contract required to collect directly from the reinsurer.Answer
  2. B
    Facultative reinsurance was utilized, requiring the reinsurer to directly indemnify the engineering firm for its proportional share of the loss.
  3. C
    This is a treaty reinsurance contract that legally designates the engineering firm as a third-party beneficiary with direct claim rights against the reinsurer.
  4. D
    This scenario demonstrates risk avoidance by the primary insurer, which shifts the direct claims settlement obligation entirely to the reinsurer.

Answer

The arrangement is a treaty reinsurance agreement, and because there is no privity of contract between the policyholder and the reinsurer, the engineering firm cannot file a claim directly against Global Re.
The scenario describes an automatic agreement for an entire class of policies, which defines treaty reinsurance. Furthermore, insurance law strictly holds that reinsurance is a contract between the primary insurer and the reinsurer. The original insured (the engineering firm) has no privity of contract with the reinsurer, meaning they have no legal right to demand payment directly from them.

Step-by-Step Solution

1
Identify the type of reinsurance arrangement based on the agreement terms.
The agreement automatically transfers 60% of the risk for 'every' professional liability policy issued.
Automatic, pre-negotiated transfer of a class of business defines 'treaty' reinsurance, as opposed to 'facultative' reinsurance which is negotiated on an individual, risk-by-risk basis.
2
Determine the legal relationship between the original policyholder and the reinsurer.
The reinsurer (Global Re) has a contract only with the primary insurer (Oakwood), not with the engineering firm.
Reinsurance is strictly a contract of indemnity between the ceding company and the reinsurer. This legal separation is known as a lack of privity of contract for the original insured.
3
Evaluate the engineering firm's right to file a direct claim.
The engineering firm must pursue its entire $1 million claim through Oakwood Insurance.
Because there is no privity of contract, the policyholder has no legal standing to bypass the primary insurer and collect from the reinsurer directly, regardless of administrative delays.

Key Concept

Reinsurance Privity and Treaty Arrangements
Estimated Time:1m 0s
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Reinsurance Concepts

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