REINSURANCE

95. A contract by which the insurer procures a third person to insure him against loss or liability by reason of an original insurance (also known as Reinsurance Cession).

 definition: It is a contract whereby one party, the reinsurer, agrees to imdemnify another (reinsured) either in whole or in part, against loss or liabilihich the later may sustain or incure under a SEPARATE OR ORIGINAL contract of insurance with a third party, the original insured

 EXAMPLE:

X insurance company issued an insurance policy of a building to Y. Here the contract is between X and Y.

 X company, TO REDUCE ITS POTENTIAL LIABILITY under the contract reinsures the risk or part of it with Z insurance company. Here another contact of insurance is entered into by X and Y.

METHODS OF CEDING

 Automatic reinsurance The reinsured is bound to cede and the reinsurer is obligated to accept a fixed share of the risk which has to be reinsured under the contract. (Prof. De Leon, p. 305) EXAMPLE: An automatic treaty may require insurer to cede any homeowner policy with a dwelling at or above 300,000 pesos

 Advantage: as to the insurer, it avoids any delay in inssuing its policy.

 Facultative reinsurance There is no obligation to cede or accept participation in the risk each party having a free choice. But once the share is accepted, the obligation is absolute and the liability thereunder can be discharged only by payment. (Equitable Ins. & Casualty Co. vs. Rural Ins. & Surety Co., Inc. 4 SCRA 343)

 ROBLEM: X company( insurer) and Y company( reinsurer) entered into a reinsurance contract. Pursuant to the said agreement, Y reinsured an amount of 2000 pesos per reinsurance application. Subsequently, A reinsurance application, covered by a fire insurance of a building was burned.

 X company paid the amount of the loss. Y company refused to reimburse X company since the matter not having been referred to the decision of two arbitrators or umpire, which, it is claimed, is the condition precedent agreed upon in Article VIII of the Reinsurance Agreement entered into between them.

 ANSWER: The term "facultative" is used in reinsurance contracts, and it is so used in this particular case, merely to define the right of the reinsurer to accept or not to accept participation in the risk insured

 but once the share is accepted, as it was in the case at bar, the obligation is absolute and the liability assumed thereunder can be discharged by one and only way payment of the share of the losses. There is no alternative nor substitute prestation.

 Advantage: the insurer receives the reinsurer's underwriting opinion before the policy is issued. Protection to reinsurer: by agreeing to accept bussiness automatically, the reinsurance in protected by the requirement that the original insurer retains its full retention limit.

 4. Retrocession A transaction whereby the reinsurer in turn, passes to another insurer a portion of the risk reinsured. It is really the reinsurance of reinsurance. (Prof. De Leon, p. 305)

 section 96. where an insurer obtains reinsurance, except under reinsurance treaties, he must communicate all the represetations of the original insured, and also all the knowledge and information he possessess, whether previously or sebsequently acquired, which are material to the risk.

 Ratonale: the risk insured against in a contract of reinsurance is the probabillity that the insurer may be compelled to indemnify for the loss under the policy issued by him.

 Effect: Generally, the insured cannot be charged for fraudulent concealment by reason of the fact that he failed to disclose matters material to the risk thereafter. However Section 96 covers KNOWLEGE and INFORMATION possessed by the insurer "whether previously or subsequently acquired, which are material to the risk. Thus, a policy may be AVOIDED where the insured conceals

 Example: X insurance company, issued a fire policy of a building owned by Y. Z insurance company accepted a reinsurance coverage under the policy. Y married H, an ex- convict for arson. All members of the board of X company were invited during the wedding. p.sebsequently thereafter the building was completely destroyed.(prof. De Leon, p. 310)

 Section 97. A reinsurance is pressumed to be a contract of indemnity against liability and not merely against damage.

 NATURE: Indemnity against liability-- The subject of the contract is the primary insurer' s risk and not the property insured under the original policy. Such contract agrees to indemnify the insurer not against the actual payment made but against the liability incurred. Thus, payment made to the insured s not a condition precedent to his demanding payment to the insurer.

 Rule on subrogation available- the reinsurer, on payment of a loss, acquire the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss.

 Contract separate from the original insurance policy- The practice is for the reinsurer to pay the insurer even before the latter has indemnified the original insured.

 Contract based on original policy- the reinsured' s risk must be the same as that covered by the original policy upon which thhe reinsurance must be made.

 Insurable interest requirement applicablethe doctrine of insurable interest is applicable in reinsurance, hence the primary insurer is not entitled to to contract for reinsurance exceeding the policy ceded to the reinsurer. Similarly, the reinsurer cannot provide coverage for the risk beyoond the scope of the coverage provided by the primary insurer.

 I. RIGHTS AND LIABILITIES A. Reinsurance is a contract between the reinsured and the reinsurer by which the latter agrees to protect the former from the latter from the risk assumed. The reinsurer is not liable to the insured either as surety or otherwise UNLESS THE CONTRACT SO PROVIDES.

 LOSS reinsurer- not liable to the reinsured for a loss under an original policy or for an amount more than the sum actually paid to the insured. It cannot be held liable for a loss which have taken place within the terms of the original policy.

 Insured- cannot recover from the reinsurer beyond the subscription of the latter under the contract of reinsurance.

 . LIABILITY OF REINSURER TO ORIGINAL INSURED a. Contract of reinsurance solely between insurer and reinsurer- the contract of reinsurance is solely between the insurer and the reinsurer. The original insured has absolutely no interest in the contract and is a total stranger to it. Hence, the original insured has no cause of action against the reinsurer but only against the insurer.

 b. Contract of reinsurance with stipulation in favor of original insured. - The contract of reinsurance may contain provisions wherby the reinsurer binds himself to pay the policy holder any loss for which the insurer may become liable. Thus, the original insured has a right both against the insurer and the reinsurer.

 contract of reinsurance amounting to novation of original contract- the original insured may maintain an action against the insurer in cases in which circumstances attending the making of the contract of reinsurance amount to a novation of the original contract...

 ... So that the originsl insurer is released from all obligations thereunder. Provided that the insured consents with the insurer and reinsurer with the novation.

 When is this EFFECTED? carried into effect by surrender of the oriiginal policy and inssuance of a new policy including the same terms and conditions, by the so called reinsurer. Hence, the ooriginal insurer is substituted by the reinsurer so that the reinsurer becomes the immediate insurer of the subject of the original policy.