Comment by Rizvan Khawar
The rule of privity of contract allows only a party to the contract to enforce the terms of that contract. Although this is an understandable rule in theory, the privity of contract rule has caused many problems in practice. Despite their intentions, contracting parties are unable to confer enforceable rights to third parties. With reinsurance contracts specifically, the rule of privity is particularly problematic in this regard. Insureds are clearly third parties to a reinsurance contract, which is a contract between a reinsurer and ceding insurer. In the United States, where third-party beneficiaries in contract have long been recognized, insureds are protected by the terms of reinsurance contracts when their insurers are insolvent. In the United Kingdom, where the privity of contract rule is more strictly enforced, parties to a reinsurance contract are unable to protect insureds in situations where the insurer is insolvent. Because of the predominance of British insurance and reinsurance groups in their respective industries, British law, in addition to U.S. law, must be considered when discussing privity of contract in this arena.
With the Contracts (Rights of Third Parties) Act of 1999 (Contracts Act of 1999 or Act), Britain has tried to correct this practical problem by partially eliminating the rule of privity of contract. The Contract Act of 1999 addresses general problems with the rule of privity of contract and does not differentiate between different types of contracts. Although the Contracts Act of 1999 does not differentiate between different types of contracts, there is no guarantee that the courts will apply the Act equally to all types of contracts. Each field carries its own public policy concerns and nuances that are not addressed specifically by the Contracts Act of 1999.
Reinsurance contracts are unique contracts in many ways. Similar to regular insurance contracts, reinsurance contracts spread the risk to the entity that is seeking to be reinsured. Also, reinsurance contracts always have an underlying third party—the insureds of the insurance policy or policies being reinsured—that are indirectly benefited by the existence of that contract. The financial ability of insurers to insure the volume of contracts that they handle is created by the relationship between insurers and reinsurers. In light of the nature of reinsurance contracts, the partial elimination of the rule of privity of contract by the Contracts Act of 1999 may affect reinsurance contracts differently than it will affect other contracts.
About the Author
Rizvan Khawar. J.D. candidate 2003, Tulane Law School; B.A. 1999, University of California at Berkeley.
Citation
77 Tul. L. Rev. 495 (2002)