In recent years, the AnJie Broad insurance team has handled several arbitration cases in the United States, the United Kingdom, and other jurisdictions involving reinsurance contract disputes, all of which concerned situations where Chinese companies, acting as reinsurers, assumed risks from overseas. Owing to the technical complexity inherent in international reinsurance business—often compounded by excessively long retrocession chains, incomplete documentation, and missing information during the ceding process—different parties may later interpret the scope of the reinsurer’s assumed risk differently following a loss. For example, there may be disputes as to which specific policy is deemed to have been ceded. This article presents observations and views primarily based on disputes arising from the coexistence of local policies and global policies commonly encountered in international reinsurance transactions.
For multinational enterprises, which typically have locations, operating offices, and factories around the world, business activities are subject not only to domestic risks but also to risks faced by their subsidiaries, affiliates, and branches located in various jurisdictions subject to different policies, regulations, and sometimes special rules applicable to foreign companies. This reality has driven international insurance companies to develop integrated global risk solutions for such multinationals. One such solution is the Controlled Master Program (“CMP”). This program generally combines a Master Policy issued in the home country of the multinational enterprise with a series of Local Policies issued in regions where the enterprise has risk exposure. In an ideal scenario, the terms of the Master Policy and the Local Policies would be completely consistent; however, in practice, they often are not. Due to differing legal and regulatory requirements across countries, variations in the risks involved, and differences in the insured’s local operating circumstances, even if the vast majority of the terms contained in the Master Policy and Local Policies are consistent, significant differences usually exist. Moreover, with respect to the selection of the insurer issuing the Local Policy, international insurers may leverage their global resources and networks by issuing local policies through their subsidiaries, affiliates, or partner local insurers. By adopting the CMP, an insurer can provide a multinational enterprise with both an integrated global insurance solution and, at the same time, tailor policy designs to specific local needs, thereby meeting the enterprise’s unified yet diversified insurance requirements worldwide.
Both the Master Policy and the Local Policies almost invariably contain “Difference in Conditions” (DIC) and “Difference in Limits” (DIL) clauses. The DIC clause typically provides that if a claim is made under the Local Policy but its terms do not apply or are insufficient to cover the loss, the broader coverage under the Master Policy will then apply. The DIL clause generally stipulates that if the limits of the Local Policy are exhausted, the higher limits of the Master Policy may be used to cover the claim. More importantly, both the Master Policy and the Local Policies typically specify that if a loss from a single insured event falls within the coverage scope of both policies, the Local Policy will serve as the primary responder. Only once the Local Policy’s limits are exhausted or its coverage is otherwise insufficient will the Master Policy respond to any remaining uncovered loss.
On the face of these provisions, the contractual language appears clear: when a loss resulting from a risk falls under the coverage responsibilities of both the Local Policy and the Master Policy, the Local Policy should pay first, with the Master Policy serving only as supplementary coverage. Such a provision can resolve the complex issues of double insurance or overlapping coverages that might arise with two or more policies. However, in international reinsurance transactions—especially among Chinese insurers—when ceding CMP risks, the reinsurance slip typically only lists the Master Policy number and records risk information identical to that of the Master Policy, with no reference to the Local Policy or the CMP as a whole. Consequently, in the event of a loss, because the Local Policy is contractually obligated to respond first, the insured and the insurer usually settle and agree upon the claim under the Local Policy. But when the original insurer or the cedant forwards the settlement agreement and the corresponding loss adjuster’s report to the reinsurer for contribution, the reinsurer may contend that it only assumed risk under the Master Policy—not under the Local Policy. Although there is a certain commercial linkage between the Local Policy and the Master Policy, they remain legally independent policies. If an incident falls within the coverage of both policies, yet the loss is entirely settled under the Local Policy (i.e., the Master Policy’s coverage is not triggered), the reinsurer is well within its rights to argue that because its assumed liability under the Master Policy has not been activated, it need not bear any responsibility at the reinsurance layer.
In a recent case handled by AnJie Broad, an in-depth examination of the parties’ true intent at the time of reinsurance contract formation revealed that both the ceding company and the ceded company did not limit their understanding of the ceded risk merely to the Master Policy but, in fact, intended to include the entire global integrated risk program—the CMP. For instance, during the retrocession phase of that case, the ceding company, via its broker, sent an email to the reinsurer that effectively ceded the entire CMP as the risk, discussing a global reinsurance arrangement without limiting the scope solely to the Master Policy or deliberately distinguishing between the Master Policy and the Local Policy. However, in the final reinsurance slip, due to insufficient clarity—for example, listing only the Master Policy number without expressly stating that the reinsurer was assuming the entire CMP—the reinsurer, based on the plain language of the slip, interpreted its assumed risk as confined solely to that under the Master Policy; i.e., only losses paid under the Master Policy would trigger its liability. Particularly when the underwriting and claims functions are handled by different personnel within a company, it is difficult to expect the reinsurer’s claims department to fully understand the true intent of the underwriting personnel when the reinsurance contract was originally concluded.
It should be noted that under Chinese law, when interpreting reinsurance contracts, the principle of contra proferentem under Article 30 of the Insurance Law (which works to the detriment of the insurer) does not apply. Reinsurance contracts are generally regarded as commercial contracts between two equally sophisticated and professional parties that have engaged in extensive negotiations; hence, the general rules of contract interpretation apply. As stipulated in Article 142 of the Civil Code of PRC, “the meaning of an expression shall be determined in light of the words used, in conjunction with the relevant clauses, the nature and purpose of the conduct, trade usages, and the principles of good faith.” Therefore, in typical cases where no other evidence can more clearly demonstrate that the true intent of the parties was to cede the entire global risk program (CMP), the content stated in the reinsurance slip will directly form the basis for determining the parties’ rights and obligations, including the scope of assumed risk. This is why reinsurers often contend that, since the reinsurance slip only contains the Master Policy number and related information, losses occurring under the Local Policy should not trigger their liability. However, the customary practices between the parties may also serve as an interpretative method, and the reinsurer’s past practices in settling claims might be used as a basis for determining liability in future similar cases.
Disputes regarding the relationship between the Local Policy and the Master Policy may further arise from several additional aspects:
As mentioned above, while the Master Policy and the Local Policy are commercially linked, they remain two legally independent policies, with different insured parties and insurers. Moreover, the risks insured, the limits of indemnity, deductibles, and exclusion clauses may vary. Although an insurer may design the Master Policy and the Local Policy with the intention of having the Local Policy pay first and then supplement any deficiency with the Master Policy, the sequence-of-payment clauses (such as the DIC, DIL, and Local Policy-first payment clauses) are often only stipulated in the Master Policy and not in the Local Policy. This may lead the insurer of the Local Policy to deny the applicability of the DIC, DIL, and Local Policy-first payment clauses contained in the Master Policy, thereby asserting that the Local Policy and the Master Policy constitute two “parallel policy structures” rather than an “umbrella policy structure,” with both insurers bearing losses in accordance with the principles of double insurance or insurance concurrence.
Furthermore, additional issues arise when the Master Policy expressly excludes “U.S. policies” from the definition of Local Policy, without a clear provision as to which specific policy or which insurer’s policy is meant by “U.S. policy.” This ambiguity can ultimately result in a situation where, after a loss is settled under the so-called “U.S. policy,” no link can be established between the indemnity under that “U.S. policy” and the Master Policy, thereby increasing the risk of reinsurer denial.
In summary, the CMP integrated global risk solution provided by international insurers to multinational enterprises is now widely applied. Both domestic Chinese insurers and reinsurers participate in these arrangements either directly or indirectly. However, regardless of how industry practitioners interpret such arrangements, it is imperative that the parties accurately and unambiguously incorporate their true intent into the contract; otherwise, disputes can easily arise. As noted above, while interpretative tools such as contextual interpretation, purposive interpretation, and reference to industry practice can be employed to ascertain the parties’ true intent, these methods are often less reliable than a clear and unequivocal contractual provision in delineating the parties’ rights and obligations. This is especially true for complex international reinsurance transactions, where both insurers and brokers must fully recognize the critical importance of the contractual text and endeavor to preemptively address potential risks or disputes during the underwriting stage.
For further information, please contact:
Wan Jia, Partner, Anjie Broad
wanjia@anjielaw.com
