Reinsurance: Bad Faith Considerations and Insolvency Dilemma

Reinsurance is insurance that an insurance company purchases from another insurance company. The original insurance company is called the reinsured, and the insurance company that is contracted is called the reinsurer. The main purpose of reinsurance is to disperse or spread the risk of loss. The reinsurance relationship is frequently characterized as an exercise of fiduciary responsibility based upon an undertaking of utmost good faith between contracting parties. However, disputes arise; most litigation involving reinsurance has been between reinsurers and persons not party to the reinsurance agreement. This paper’s first major area of discussion is the relationship between the reinsurer and the reinsured. In particular this paper will focus on whether the duty of disclosure in the reinsurance context rises to a fiduciary duty, issues concerning reinsurers’ involvement in the defense of claims, and the liability of the reinsurer to reimburse ceding companies for losses resulting from the ceding company’s failure to perform contractual obligations. This paper’s second major area of analysis concerns reinsurance-related issues stemming from the insolvency of insurers. Finally, this paper discusses the insolvency dilemma that the insurance industry has recently encountered and examines possible options available to reinsurers and the reinsured in their efforts to stabilize practices in the reinsurance business