Insurance companies can become insolvent. This is an ongoing issue in Puerto Rico following hurricanes Irma and Maria. In addition to Real Legacy Assurance Company’s insolvency, Puerto Rico’s Insurance Commissioner reportedly fined various insurers for delays in handling claims. Even if your insurance company is insolvent, it may have purchased reinsurance. While the general rule is that a policyholder cannot make a claim directly against the reinsurer, there are exceptions to the rule. One such exception is when the reinsurance contract contains a “cut-through” provision. Cut-through provisions generally allow policyholders to make claims directly against the reinsurer if the original insurance company is insolvent. For a detailed discussion on this issue, we repost the article by Syed Ahmad, Patrick McDermott, and Yaniel Abreu of Hunton Andrews Kurth LLP. The article is titled “My Insurance Company Is Bankrupt, But Is Reinsured. Can I Make A Claim Directly Against The Reinsurer?” and was published on Law.com’s Eye on the Experts column. The article addresses the enforceability of cut-through provisions under the laws of multiple jurisdictions.
As discussed in the article, cut-through clauses in reinsurance contracts are generally enforceable. Indeed, they are an important tool that policyholders can use to recover insurance proceeds even if their insurance company is insolvent. Policyholders, however, must carefully evaluate the enforceability of these provisions if they are considering a direct action against the reinsurer. The article discusses those issues and case law on this topic.