Clauses Common to Excess of Loss Contracts +


Sarah J. Peterson, J.D., CPCU* and

Bernice Gordon, J.D.**

     Excess of loss reinsurance, also known as nonproportional reinsurance, differs from pro rata or proportional reinsurance. In excess of loss, the reinsurer's portion of a loss depends upon the size of the loss: the insurer as reinsured retains all loss(es) up to a predetermined amount(s) and, subject to some limit, the insurer recovers all or a major portion of any amount(s) in excess of the retained amount. Accordingly, excess of loss clauses are more complicated than those used in proportional reinsurance.

     The names of the reinsureds are different, too. As there are no cessions of insurance liability, premium, and losses in excess of loss reinsurance (as are shared in pro rata reinsurance), the excess of loss reinsured is indemnified only for excess losses and is correctly referred to as the reinsured or simply the company (instead of the ceding company or cedent, as in pro rata reinsurance). However, either reinsured is often called a ceding company, albeit loosely, in recognition that it could be covered by both types of reinsurance simultaneously.

     The clauses vary for the three types of agreements -- per risk (or per policy), per occurrence (property catastrophe or casualty clash), and aggreggate. All three have common traits to be addressed in this chapter, with variations described in subsequent chapters. Each clause used is a result of the drafter's style and the corporate format followed. The important point is that the reinsurance document should cover all elements required to set forth clearly the intent of the parties.



The Reinsuring Clause is known by other titles as well, e.g., Cover Clause, Business Reinsured Clause, or Application of Agreement . . .

+ Footnotes appear at the end of the chapter.

* Vice President, Contract Department, AMERICAN RE-INSURANCE COMPANY, 555 College Road East, P.O. Box 5241, Princeton, New Jersey 08543-5241.

** Assistant Vice President and Manager, Contract Department, FOLKSAMERICA REINSURANCE COMPANY, 1 Liberty Plaza, New York, New York 10006. Autobiographies follow the chapter.

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