Intermediary clause
A treaty clause saying the reinsurance broker is the intermediary for all communications and payments, and allocating the risk of its failure: the reinsurer bears it in both directions.
A reinsurance broker collects a cedant's USD 5 million premium to pass on to reinsurers, then fails before remitting it. Who loses? The intermediary clause answers. It is standard in American treaties, and the law of several states requires it. It contains three provisions. The broker is recognized as the intermediary negotiating the contract and through whom all communications pass. Payments by the cedant to the broker are deemed paid to the reinsurer: if the broker fails to pass on the premium, the cedant is discharged, and the reinsurer takes the loss. Payments by the reinsurer to the broker are deemed paid to the cedant only if they actually reach it: if the broker keeps a claim payment, the cedant keeps its claim against the reinsurer. The risk of the broker's failure therefore rests on the reinsurer in both directions. The rule protects the cedant, often a local insurer subject to regulated solvency, at the expense of a reinsurer better placed to monitor the broker. Reinsurers respond with broker approval conditions, segregated accounts for client funds, and direct payments for large losses. Elsewhere practices vary, and not every broker holds the funds.
Textbook case. Cedant pays USD 5M of premium to its broker, who keeps it and fails. The cedant stays covered: the premium is deemed received by the reinsurers, who lose USD 5M. Later, a USD 3M claim is paid by the reinsurers to the broker before its failure; the cedant never received it. It can claim the USD 3M from the reinsurers, who pay a second time. The total loss for reinsurers is USD 8M.
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