Cut-through clause

A cut-through clause breaks the normal privity of a reinsurance contract, which binds only cedant and reinsurer and creates no right for the insured. It provides that on the cedant's insolvency the reinsurer will pay the ultimate insured, or a named beneficiary, directly and up to its share. The problem it solves is credit quality: an insured buying from a weakly rated carrier, often because a fronting arrangement or a captive requires it, wants certainty that the reinsurer's strength will actually reach it. Without cut-through that strength is worthless to the insured, since the reinsurance recovery falls into the liquidation estate and is shared among all creditors. Its validity turns on the governing law and on the insolvency forum: some regimes see an unlawful preference between creditors and set it aside, others uphold it. A cut-through clause is therefore only worth the legal opinion obtained on the likely place of liquidation, not on the place of the contract. The 2001 failure of Reliance Insurance Company, one of the largest property and casualty insurer collapses in US history with several billion dollars in assets, exposed this risk concretely: many insureds covered by policies Reliance fronted found themselves dependent on state guaranty funds rather than the underlying reinsurance, for want of an explicit cut-through clause binding them directly to the reinsurers.

An industrial group insures its European sites through a captive, reinsured at 90 percent. Its finance director requires a cut-through clause in favor of the insured subsidiaries in 2026, with legal opinions on the four jurisdictions where the captive might be wound up. Two of the four opinions conclude the clause would not bind the local liquidator, which leads the group to require in addition a 40 million euro pledge of assets.

Cut-through, Clause de paiement direct, Cut through endorsement, Clause de recours direct