Recently, a reinsurance contract dispute case between Insurance Company A and Insurance Company B, represented by lawyers Xu Wei and Yang Jing of Tian Yuan Law Firm, was selected as a classic case by the Beijing Financial Court and analyzed on its official WeChat account. In this case, Tian Yuan Law Firm represented the defendant, Insurance Company B.

The Beijing Financial Court held that reinsurance, as an important institutional arrangement for diversifying financial risks, relies on the good faith performance and clear rights and responsibilities of market participants for its standardized operation. The application of the "shared fate" principle in reinsurance contracts, i.e., the application of claims-following clauses, has clear boundaries. When a reinsurance contract contains a claims control clause requiring notification of claims, the ceding insurer should actively fulfill its claims notification obligation . Improper fulfillment of this obligation allows the reinsurer to raise the right to raise the claim- sharing obligation. When a loss ratio below a certain percentage becomes a prerequisite for the reinsurer to fulfill its claim-sharing obligation, the specific facts regarding the loss ratio become the core facts determining whether the reinsurer can refuse to share the claim. In this case, the ceding insurer failed to actively fulfill its claims notification obligation during the contract performance stage and neglected to provide evidence of the loss ratio during the litigation process. Because of its violation of the claims control clause, the conditions for reinsurance claim sharing were not met. Ultimately, the reinsurer can refuse the application of the claims-following clause, i.e., it does not have to fulfill its claim-sharing obligation.

This case further clarifies the scope and boundaries of the reinsurer's liability by applying judicial rulings, providing important guidance for regulating the reinsurance market order and balancing the rights and obligations of ceding and reinsurers. This guidance not only strengthens the awareness of good faith performance among reinsurance parties but also provides a standard for value judgment in resolving reinsurance disputes, and has universal normative significance for maintaining the fairness and efficiency of the reinsurance market and promoting the reasonable diversification and sound development of insurance risks.

 

Case Details

When a reinsurer breaches the claims control clause of the loss ratio limit notification, the reinsurer may refuse to share the loss.

— A case concerning a reinsurance contract dispute between Insurance Company A and Insurance Company B

1. Basic Case Facts

In 2021, Insurance Company A and Insurance Company B signed a Co-insurance Agreement to cooperate on an employer's liability insurance project for Company C. Company A partially transferred its insurance business for this project to Company B through reinsurance, sharing the insurance payout liability proportionally. The original insurance agreement included a business suspension mechanism; if the overall loss ratio of the project exceeded 50%, both parties would suspend cooperation and renegotiate the underwriting terms. During the cooperation period, Company A claimed a share of the claims from Company B, but Company B argued that Company A had failed to diligently assess losses and failed to fulfill its notification obligations, refusing to assume partial liability. A dispute arose, and Company A filed a lawsuit.

2. Judgment Result

The Shijingshan District People's Court of Beijing dismissed all of Company A's claims in the first instance. Company A appealed, but the Beijing Financial Court, after hearing the case, ruled to dismiss the appeal and uphold the original judgment.

After hearing the case, the Beijing Financial Court determined that the main points of contention in this case were as follows:

First, the legal relationship in this case needs to be determined, specifically whether it is a co-insurance or reinsurance relationship. Although the "Co-insurance Agreement" in question is titled "co-insurance," its participating parties, the composition of rights and obligations, premium collection, and liability assumption after a loss occur all conform to the definition and characteristics of reinsurance. Therefore, it should be recognized as a reinsurance contract.

Secondly, the question arises whether the circuit breaker clause falls within the scope of the reinsurance contract. Specifically, does the agreement stipulating that if the overall loss ratio of a project exceeds 50%, both parties suspend cooperation and renegotiate underwriting conditions fall under the reinsurance contract in question? Based on the facts ascertained in this case, the attached "Co-insurance Confirmation Letter" in the co-insurance invitation email sent by Company A to Company B in 2021 indicated that both parties had reached an agreement on a 50% loss ratio warning mechanism and a 50% maximum loss ratio mechanism . Furthermore, the employer's liability insurance agreement signed between Company A and Company C also stipulated a business circuit breaker mechanism. When the overall loss ratio of a project exceeds 50%, both parties suspend cooperation and renegotiate underwriting conditions. According to the back-to-back cover principle, "reinsurance and primary insurance are homogeneous in terms of liability scope, and the loss restriction conditions of the primary insurance naturally extend to reinsurance." The circuit breaker mechanism is a core clause for risk control in primary insurance and constitutes the basis of the reinsurance transaction. When the loss ratio was likely to exceed the limit, Company A continued to pay without suspending cooperation, constituting a lenient payment, and Company B had the right to refuse to share the loss. Therefore, the loss ratio circuit breaker clause naturally falls under the scope of reinsurance contracts.

Third, there is the issue of loss ratio calculation and liability allocation, specifically whether Company B has the right to refuse to share the loss when the loss ratio cannot be calculated . Loss ratio monitoring is a necessary step in "due diligence in loss assessment." As the insurer of the original insurance contract, Company A possesses key materials and a dominant position in calculating the loss ratio, yet it refused to provide these materials to the court, making it impossible to ascertain the key facts regarding the loss ratio . Furthermore, Company A admitted that the average loss ratio of the employer's liability insurance project in question was above 76%, exceeding the 50% stipulated in the contract. Its failure to promptly exercise its contractual rights to suspend cooperation with the policyholder and its direct payment constituted acquittal, thus giving Company B the right to refuse to share the loss.

Fourth, does the defect in the notification obligation affect the apportionment of compensation? The Co-insurance Agreement in question clearly stipulates the notification obligation upon occurrence of an insured event. However, Company A failed to fulfill its notification obligation as stipulated in the regulations and contract. While the loss ratio calculated based on the insured event is a prerequisite for Company B to control commercial risk, although this notification obligation does not necessarily lead to the loss of Company A's right to claim or the exemption of Company B's liability for compensation, if Company A cannot provide evidence that the loss ratio is lower than the agreed standard, Company B can refuse to apportion the loss on this basis.