Although the “club atmosphere” around reinsurance has been disturbed in recent years due to a surge in reinsurance disputes and the regulator’s enhanced initiatives to boost contract certainty1, the problem of uncertainty in reinsurance relations remains real2. The reasons for this state of affairs can be summed up as follows:
- No binding authorities on reinsurance matters in most jurisdictions, except for the UK and US3 (reinsurance disputes are usually resolved through arbitration, and so behind closed doors)
- 'Deal now, details later culture' (the placement of a reinsurance contract is usually “fast-tracked” and reinsurance contracts are often drafted with little or no legal assistance4)
- Discrepancies and different interpreting outcomes arising as a result of the various laws governing the reinsurance contracts (e.g. one and the same reinsurance usage can be interpreted differently in various jurisdictions5).
In order to mitigate this problem and reduce the number of reinsurance disputes, the academia - in collaboration with major market stakeholders (including reinsurers and insurers)6 and the UNIDROIT -developed the Principles of Reinsurance Contract Law (“PRICL”). The PRICL were published at the turn of 2019/2020 (please see PRICL 1.0 20197).
Just over the year after the roll-out of the first version of the PRICL, it is worth taking a closer look at the project, especially now that it is gaining more traction8.
What are the PRICL?
Derived from legal systems all over the world, the PRICL are a private codification of reinsurance law and therefore a set of “soft law” rules9. Importantly, the PRICL have been linked to the Principles of International Commercial Contracts 2016 (PICC) in the sense that the PICC and the PRICL must be viewed as a uniform package.
Outline of the content of the PRICL
The PRICL consist of 5 chapters containing general provisions (provisions governing structural aspects and interplay between the PRICL and the PICC), as well as reinsurance-specific rules accompanied by explanatory notes and examples. With the principle of ‘utmost good faith’ lying at the heart of the PRICL10, they span a range of critical dispute areas where there is some uncertainty as to outcome, e.g. duty to follow the settlements and follow the fortunes (both widely discussed in the context of COVID-related business interruption claims), aggregation (well-known from the reinsurance disputes related to the 9/11 losses) and loss allocation. Interestingly, the PRICL set out some rules on dispute resolution (Article 2.1.4 of the PRICL).
Application of the PRICL – key takeaways
Generally, the PRICL will apply only when parties choose them as the law applicable to the substance of the dispute (in contracts with an arbitration clause)11 or incorporate them into their contract by reference or by rewriting the PRICL (absent the arbitration clause, the PRICL would merely represent contractual terms, such that whenever rules in the PRICL are at odds with mandatory provisions of the governing law, the latter will prevail).
If the parties to a reinsurance contract wish to avail of the PRICL and the PICC, it is preferable that they use standard contractual clauses contained in the PRICL. Also, mindful of the fact that arbitrators will apply the chosen rules as long as they are exhaustive (in the sense that the dispute may be resolved on their basis without referring to the otherwise applicable national law) – it is advisable to indicate within ‘the choice of law’ clause that the PRICL and the PICC are to be supplemented by the relevant national law12.
According to the explanatory notes contained in the PRICL, it is also possible for a choice of the PRICL to be made implicitly. Nevertheless, in practice this scenario may face some hurdles (e.g. under Polish law, an arbitral tribunal must be expressly authorised by the parties to resolve the dispute on the basis of general principles of law or equity).
PRICL: Impact on reinsurance disputes?
PRICL may impact on dispute resolution in several ways. Firstly, they can be chosen by the parties as the law governing their dispute or incorporated into the contract of reinsurance. Secondly, they may apply to the merits of the case, even absent an explicit choice of law in favour of the PRICL. This involves the following situations:
- [PRICL as the lex mercatoria] when delivering their award arbitral tribunals are often obliged to cater for settled usages (the so-called lex mercatoria) applicable to a given legal relationship13. In turn, the PRICL reflect (at least to a certain extent14) the customs found in the reinsurance markets and, therefore, can be employed by an arbitral tribunal when referring to the reinsurance usages;
- [PRICL as the law chosen by the arbitral tribunal] various arbitral awards show that in international commercial arbitration the arbitral tribunal – when determining the applicable law to govern the dispute (absent an explicit choice of law made by the parties) – may reach for non-state laws, such as the PRICL;
- [PRICL as the replenishment of the domestic law] ultimately, the PRICL may be used by the state courts to interpret or supplement domestic law, which may prove to be a useful tool where there is very little law around specific reinsurance themes (importantly, the state courts are becoming increasingly inclined towards using such instruments notably in the absence of specific domestic regulations, e.g. the Polish Supreme Court referred to the Principles of European Insurance Contract Law in the context of group insurance in its ruling of 12 January 2018, case ID II CSK 222/1715).
‘Waving the gentlemen agreements goodbye’?
It remains to be seen to what extent the PRICL will be adopted by the industry (the market rumour has it that some reinsurers have already incorporated some of the PRICL terms into their wordings) and how the PRICL will impact on the disputes going forward. Some interesting conclusions can already be drawn from the AIDA PRICL Mock Arbitration that took place on 17 September 202016. For example, it follows from the PRICL Mock Arbitration that sometimes it can be really difficult to eschew the ‘national’ flavour when interpreting them (even though it is intended that the PRICL be interpreted uniformly)17.
Please do not hesitate to contact us if you have any queries.
1Noussia Kyriaki, Reinsurance Arbitration, 2013, p. 15
2In this vein, it should not come as a surprise that often courts or lawyers outside the industry perceive reinsurance as something ‘arcane’ and express their incomprehension of reinsurance practice (see e.g. National American Ins. Co. v. Certain Underwriters at Lloyd's London, 93 F.3d 529, 537; 9th Cir. 1996)
3While a fairly considerable amount of case law is available in the UK and US, there are few rulings on reinsurance matters in civil law jurisdictions. As for Poland, there is only one ruling referring to the contract of reinsurance, which dates back to 1970.
4Clyde & Co LLP, Reinsurance Practice and the Law, Looseleaf, no. 12.135.
5For example, in some jurisdictions the duty to follow the settlement is deemed to be an implied term, whereas elsewhere it is rejected in the absence of an agreement in the contract. For more please see the introduction to PRICL, p. 2-4.
6This streamlined and collaborative approach by market and academia is a great advantage of the PRICL, which may contribute to the success of the project (please note that arbitral tribunals sometimes reject the application of private codifications on the grounds that these rules are the result of academic research and are relatively little known to the business at their roll-out).
7https://www.ius.uzh.ch/dam/jcr:c5e36159-2cbc-4686-83ce-1067bc4704a3/PRICL_1.0_2019.pdf
8The publication of the PRICL 2019 does not mark the end of the PRICL Project. The second edition of the PRICL is scheduled to come into force in 2023.
9H. Heiss, From Contract Certainty to Legal Certainty for Reinsurance Transactions: The Principles of Reinsurance Contract Law (PRICL), Scandinavian Studies in Law, vo. 64 (2018), p. 101. Access via Heiss, PRICL_Scandinavian Studies in Law.pdf (uzh.ch).
10Importantly, parties that wish to avail of the PRICL will not be allowed to exclude the application of the duty to observe utmost good faith,
11Most national arbitration laws allow for such choice, which is in tune with Article 28(1) of the UNCITRAL Model Law on International Commercial Arbitration 1985/2006, though some Polish legal scholars question the validity of the choice of lex mercatoria under Polish law as the law applicable to the merits of case. But this is a minority opinion.
12For example: ‘This contract shall be governed by the Principles of Reinsurance Contract Law (2019) and, with respect to issues covered neither by such Principles nor by the UNIDROIT Principles of International Commercial Contracts (2016), by the law of [State X]’
13For example, please see Article 1194 sec 2 of the Polish Code of Civil Procedure: However in each case the arbitration court shall take into consideration the provisions of an agreement and established customs applicable to a given legal relationship.
14Importantly, the PRICL are not just about rewriting existing reinsurance usages and practice. According to the authors – the PRICL go the extra mile and are intended to provide the actors of reinsurance transactions with an alternative to the usages and practices found in the reinsurance markets.
15http://www.sn.pl/sites/orzecznictwo/OrzeczeniaHTML/ii%20csk%20222-17-1.docx.html
16https://aidainsurance.org/meetings/pricl-mock-arbitration_2020-09-17
17The extract from the PRICL Mock Arbitration award: “the guidance with respect to the reading of the follow the settlements clause can be found in Insurance Co of Africa v Scor (UK) Reinsurance [1985] 1 Lloyd’s Rep 312. The tribunal is aware of the fact that PRICL do not implement any of the national laws in this respect, however, the PRICL aim to set international reinsurance principles and the reading of the follow the settlements by the Scor case is an internationally accepted principle of reinsurance law“. For more, please see: https://aidainsurance.org/meetings/pricl-mock-arbitration_2020-09-17
