The King's New Clothes: Insurance and Reinstatement Challenges
Once upon a time, a poor king set up an insurance company called GRIM to protect his two valuable suits of clothes. Despite no past losses, multiple incidents in 2015 led to claims and reinstatements, testing the limits of the reinsurance agreement with Go Singh Forit. GRIM faced challenges with the reinstatement clause, ultimately exhausting coverage after the second loss. The story highlights the complexities of insurance and the need for clear reinstatement terms.
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The kings new clothes? One upon a time there was a king, but a poor king. The king only had two suits of clothes, a pair of pajamas and a magnificent suit of state. On normal days and during the night he wore pajamas, and on important occasions he wore his magnificent state suit. His pajamas were worth 200, and his magnificent state suit 5,000. He decided he needed insurance. Although a far off land, the king was a modern man and decided to access the reinsurance markets direct. So he set up a captive called The Great Immaculate Me Insurance Company, or GRIM for short, with 20 fully paid up capital. After searching the markets he found a Mr. Ha Ha representing the very famous Go Singh Forit Reinsurance Company in Zurich, Switzerland who agreed to provide cover 100%. 27/09/2024 Reinstatement Chrystal clear? 1
The kings new clothes? The slip was worded as follows: Risk Excess of Loss Cover Reassured Great Immaculate Me Insurance Company Reinsurer Go Singh Forit, Zurich Period 12 months at 1st January 2015 Type Excess of Loss Class Business written in the Reinsured's Fire Department, specifically one pair of pajamas worth 200, and one magnificent suit of state worth 5,000 Limit 4,995 excess of 5 Reinstatement One full reinstatement at 100% additional premium, pro rata as to amount only Premium 100 9/27/2024 Reinstatement Chrystal clear? 2
The kings new clothes? The reinstatement clause in the Contract read as follows: ARTICLE 7 - REINSTATEMENT In the event of a claim under this Contract, it is agreed that the amount of liability hereunder is reduced from the time of the occurrence of the loss by the sum payable on such a claim. However, the amount so exhausted is immediately reinstated from the time of the occurrence of the loss. For the amount so reinstated, the Reinsured agrees to pay an additional premium calculated at pro rata to amount only. Nevertheless, the liability of the Reinsurer shall not exceed GBP 4,995 in any one loss occurrence, nor GBP 9,990 in all in any one contract year. 9/27/2024 Reinstatement Chrystal clear? 3
The kings new clothes? Unfortunately, despite no losses ever having occurred in the past, 2015 was not a good year for the king. Already in early February there was a fire in the palace wash room and his pajamas went up in flames. Result: Claim of 195 on the agreement, payment of 3.90 to reinstate the cover. Then his beautiful state suit was ruined in an assassination attempt, by fire, in late October 2015. Result: Pending claim of 4,995. Then, believe it or not, his new pajamas were again destroyed by fire on 15th November 2015 when alcohol was split all over them and they were left too close to an open fire. 9/27/2024 Reinstatement Chrystal clear? 4
The kings new clothes? GRIM again claimed 195 from the Reinsurer who replied as follows: GRIM, Only one reinstatement, a one-time right to reinstate, thus cover exhausted after second loss. Ha Ha Go Singh Forit The King was furious, and he summoned his lawyer to take the case before a single arbitrator in London Retired Law Lord Hobson. 9/27/2024 Reinstatement Chrystal clear? 5
The kings new clothes? GRIM s lawyer argued: The wording of the contract was clear the liability of the Reinsurer shall not exceed GBP 4,995 in any one loss occurrence, nor GBP 9,990 in all in any one contract year , the first two losses only reached 195 + 4,995 = 5,190. The cover provided for 1 full reinstatement of the amount, there was still a cover for 4,800, subject of course to a reinstatement premium to be paid for the second and third losses. Clearly enough cover to pay for the loss of the pajamas. Equally the words any one loss occurrence implied there could be a number of occurrences. 9/27/2024 Reinstatement Chrystal clear? 6
The kings new clothes? Go Singh Forit argued through their lawyer as follows: Many contracts contain what is known as a reinstatement provision, which normally would provide that the reinsured is required to pay an additional premium for reinstatement coverage. Once a layer is breached by collection of claims, the reinsured buys replacement coverage for the proportion of layer used, i.e., a reinstatement, for an additional premium. This contract provides for 1 reinstatement, i.e. a one time right to reinstate. The reinstatement clause is clear it provides for two losses to the cover. The king has already had two losses, one in early February, one in late October. This is also why the Reinsurer had made no attempt to collect a balance of reinstatement premium after the second loss. Hobson s choice?? Hobson s decision? 9/27/2024 Reinstatement Chrystal clear? 7
