After presenting at the Casualty Actuarial Society Seminar on Reinsurance, Chicago Partner Ernesto Palomo was quoted throughout a Carrier Management article on how reinsurers might respond when cedents pay their insureds for business interruptions stemming from COVID-19. He presented several scenarios in which primary insurers paid claims under policies that did not have virus exclusions and ceded losses to their reinsurers under contracts with “follow-the-fortunes” language. Palomo noted that three factors determine whether a claim paid by a ceding company is going to be covered by a reinsurance agreement: the terms of the reinsurance contract, the terms of the underlying policy and applicable laws. Focusing on the reinsurance agreement, he reviewed two typical provisions: follow-the-fortunes and follow-the-settlements clauses.
In addition, Palomo explained the aggregation clause typically found in excess-of-loss treaties, which allows a ceding insurer to combine multiple loss occurrences so that only one retention needs to be satisfied — as long as they are linked to a common event or cause. “We saw in the context of asbestos, pollution and health hazard claims that insureds and cedents employed many creative arguments to describe a covered event. In the [COVID] situation, I would predict certainly that cedents are going to use stay-at-home orders as the event that will allow the cedent to combine losses out of one event,” he said.
Palomo is a member of Locke Lord’s Insurance, Reinsurance, and Business Litigation and Dispute Resolution Practice Groups.
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