There is probably a PhD thesis to be written about the reinsurance market’s use of long words and jargon. In the meantime, large cheques have already been written about its use of the particular long words ‘facultative reinsurance certificate’ and the shorthand version ‘fac cert’.
The origins of the fac cert lie in the practice of ‘fronting’.
Fronting traditionally works as follows. An insurer lacks authorisation to write a risk in a particular territory. It therefore gets an authorised insurer to write or ‘front’ the risk. The unauthorised insurer then reinsures the authorised insurer for 100% of the risk, or close to it.
Large international insurers are authorised in many territories and are well placed to offer fronting insurance. They are equally well placed to insist that the corresponding reinsurance is on favourable terms. This is where the fac cert comes in. It is (generally) a document containing ‘non-negotiable’ reinsurance terms which the fronting insurer insists the reinsurer agrees as a precondition to fronting the risk. Over time, other types of cedent have sought to deploy fac certs including captive insurers.
Fac certs vary widely but common terms include:
In other words, fac certs frequently deal with many of the ‘pinch points’ in a reinsurance contract negotiation, typically in the reinsured’s favour.
Furthermore, a fac cert is often circulated and agreed after the traditional placing process using the Market Reform Contract (MRC) is complete. In these circumstances, underwriters may be tempted to believe the MRC will always prevail over a mere ‘certificate’.
The Tyson v PartnerRe decision demonstrates that this belief may not survive contact with an English court.
Tyson International Company Limited (Tyson) is the captive insurer of Tyson Foods.
In 2020/21, PartnerRe wrote part of Tyson’s all risks property reinsurance programme under a contract in the MRC format.
After the 2020/21 MRC was bound, PartnerRe agreed: (1) a fac cert in the Market Uniform Reinsurance Agreement (MURA) format for the same risk, and (2) an endorsement that said:
“The Agreement of Facultative Reinsurance … between Tyson ... and... PartnerRe … is agreed subject to the terms of [the MRC contract reference].”
Both at first instance, and on appeal, the court held that this endorsement meant the 2020/21 MRC took precedence over the MURA fac cert.
On 30 June 2021, PartnerRe issued an MRC reinsuring Tyson in respect of all risks property damage occurring from 1 July 2021 to 1 July 2022 for 10% of USD 225m excess of USD 75m. English law and jurisdiction applied to the MRC. Apparently no other reinsurers were parties to the contract.
On 7 July 2021 – after the MRC was bound and the risk had incepted – the broker wrote to PartnerRe saying:
“Please find attached the fac cert for agreement. If you can consider and agree as soon as possible then the processing of funds etc can begin.”
PartnerRe duly signed and stamped the attached fac cert, which was again in the MURA format. This fac cert was governed by New York law and contained an arbitration clause saying any arbitration would take place in New York unless the panel agreed otherwise. It also contained an entire agreement clause. This time around there was no endorsement giving the MRC precedence.
On 30 July 2021, Tyson Foods’ poultry rendering facility in Alabama suffered a fire, causing an estimated USD 500m+ of property and business interruption loss.
On 25 July 2022, PartnerRe sought to avoid the 2021/22 reinsurance on the basis that Tyson at placement had significantly understated the value of various of its facilities.
On 3 May 2023, Tyson issued proceedings against PartnerRe in the London Commercial Court. The next day, PartnerRe issued arbitral proceedings against Tyson in New York.
When the question of jurisdiction came before the English court, the judge had to decide whether the fac cert was “an administrative document of no contractual effect”, such that the dispute should be heard in London in line with the MRC terms, or whether the fac cert had varied or superseded the MRC, such that the fac cert’s New York arbitration provisions applied.
Neither the first instance or appeal judgments record why PartnerRe was so keen to be in New York and Tyson was not, although presumably there were some compelling reasons. It is worth remarking, however, that this is an unusual fact pattern: fac certs generally favour reinsureds and it is usually the reinsurer that argues an MRC should trump the fac cert.
Not so here. The reinsured captive, Tyson, wanted the MRC to take precedence and deployed a range of arguments to this effect.
Perhaps Tyson’s most powerful point was that it was contrary to business common sense for the parties to agree a different contract (the MURA fac cert) just eight days after agreeing the MRC contract. According to both the Court of Appeal and the judge at first instance, however, this was not enough to oust the contractual status of the fac cert.
Tyson went on to argue that the fac cert was “no more than a certificate, issued for administrative purposes only” and a “summary of cover”. The court found that this made no sense in view of the facts that (1) the fac cert was headed “Agreement”, (2) it was significantly different to the MRC and (3) it was a sufficient contract in itself.
Tyson also pointed out that the MRC contained, among other things, a communicable disease clause, whereas the fac cert did not. If the parties had intended the fac cert to supersede the MRC, Tyson argued, then the communicable disease clause would surely have featured in the fac cert as well. The Court of Appeal found this to be a “flimsy basis” to deny that the fact cert was a valid contract.
Finally, Tyson argued that any change to the parties’ contract needed to comply with the General Underwriters Agreement (GUA) rules incorporated by reference in the subscription agreement section of the MRC – and the agreement of the fac cert was not in line with the GUA. The Court of Appeal held that the subscription agreement and the GUA set out the procedure by which a following market, if there was one, would be notified and bound by contract changes – but, here, there was no following market and so the GUA did not apply (the judgments do not, incidentally, relate the fate of the other 90% of the USD 225m excess of USD 75m).
In short, the Court of Appeal categorically upheld the first instance decision that the fac cert ‘trumped’ the MRC.
As the court expressly recognised, the outcome would have been different if the parties had agreed an endorsement establishing the primacy of the 2021/22 MRC, as they had done in the prior year[1]. Lesson 1: If you want to establish the primacy of a pre-existing contract, expressly record it in a contractual document.
The outcome might also have been different in the absence of an entire agreement clause in the fac cert[2]. Lesson 2: If you do not want a fac cert to trump a pre-existing contract, do not agree an entire agreement clause in the fac cert.
The fundamental lesson, however, is as old as the hills. Lesson 3: Do not agree fac certs – or any other contractual document – without ensuring you understand and agree to its terms and effects.
In short, a fac cert may not be just an “administrative” document. It may – as Tyson v PartnerRe demonstrates – rewrite the contract altogether.
For more information on this topic, or other areas of reinsurance, please get in touch.
[1] Tyson v PartnerRe [2024] EWCA Civ 363 at paragraph 50.
[2] Ibid. paragraph 49.
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