Recently I made a blog on Ultimate Net Loss Clause (UNL Clause) and explained what is UNL and what is a UNL Clause in a Non-Proportional Reinsurance.
One of my participants in a training program asked me whether UNL Clause and Net Retained Clause was the same and if yes, why is it that in some treaties both the clauses are used.
We saw that UNL clause was not only defining what a UNL is as far as that particular treaty was concerned but also explaining what all expenses can be included, what all has to be deducted and what expenses cannot be considered as part of the claim for reinsurance recovery purposes.
UNL clause uses the terms like “the sums actually paid” and “recoveries from all reinsurances”.
This can create two doubts:
a) Whether a reinsurance recovery is only after the reinsured has actually paid the claim to the insured?
b) If a recovery has not been made from a particular reinsurer (either because he has become insolvent or because he is unwilling to pay), can that be added to the net loss and recovery made from XOL?
What is the Net Retained Lines Clause talking about?
It is making it clear that as per established practise what ought to be retained is only protected by this XOL.
If due to error or omission, reinsured failed to do a reinsurance or the reinsured failed to collect from a reinsurer in respect of a treaty which inures to the benefit of this reinsurance, do not expect this XOL to protect your increased net loss;
As we can see both these clauses are trying to define what can be recovered from the XOL contract. To that extent they are similar. However, their emphasis is different. Hence, in some treaties we find both the clauses.
If a treaty has only UNL clause and the Net Retained Lines clause is missing, does it make it better for the reinsured? Probably yes but there are enough case laws which does not allow such advantage to be taken by reinsured.
One question does come to our mind- if both these clauses have similar purposes to achieve, is it not possible to make changes in UNL clause to incorporate the wording of the Net Retained Lines clause? The answer is YES. That would be better than having two separate clauses.
Blog by Atmaram Cheruvu
