Alterations clause
A clause requiring the cedant to inform reinsurers of any material change in its underwriting, rates or standard policies during the treaty, and sometimes to obtain their agreement.
A property cedant signs an excess of loss treaty in January on the basis of the previous year's policies, with a deductible of ten thousand euros and a flood exclusion. In April, it cuts the deductible to one thousand euros to regain market share, and adds flood cover to its contracts. The reinsurers, whose premium was calculated on the old exposure, discover the change at the first loss. The alterations clause exists to prevent that. It requires the cedant to notify significant changes in its underwriting policy, rates, policy conditions, per-risk limits, facultative reinsurance conditions or geographic zones, before they take effect or within a set period, and depending on its wording it makes cover subject to the reinsurers' agreement. The degree varies: simple information, prior agreement for changes that increase the risk, or the reinsurer's right to adjust the premium or terminate. Without a clause, the duty of utmost good faith in insurance law in principle requires information on material changes, but the sanction is less clear. A dispute over what counts as a significant change is frequent after a big loss.
Textbook case. Treaty of EUR 5M excess of EUR 1M. The cedant lowers its deductibles and widens flood cover without notice. A EUR 4M flood loss hits a portfolio of 800 risks that would not have been covered under the old wording. The reinsurer refuses to pay, invoking the alterations clause; the cedant argues that the change was known to the broker and that the clause does not cover standard policies. Arbitration rules on the notion of a significant change.
alterations clause, alterations clause reinsurance, notice of material change, underwriting changes clause, change in underwriting conditions clause
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