Ex gratia payment
An indemnity paid by an insurer without being bound to by the contract, for commercial or fairness reasons, which the reinsurer need not follow absent an express clause.
An ex gratia payment is a sum an insurer pays its insured while considering that it is not bound to, because the loss is excluded, outside cover or time-barred. It serves commercial reasons, preserving the relationship with a major client or broker, or fairness, when strict application of the contract would produce a result deemed unacceptable. The insurer often presents it as a settlement without admission of liability, so as not to create a contractual precedent other insureds could invoke. The difficulty moves to reinsurance. Follow clauses require the reinsurer to follow the cedent's settlements when made in good faith and within the scope of the reinsured contract; a payment the cedent itself acknowledges as not due falls outside that scope. Unless an express clause authorizes ex gratia payments, often capped or subject to the reinsurer's prior consent, the cedent therefore bears them alone. For the underwriter, the frequency of such payments is also a signal: it reveals wording that no longer matches what the market or public opinion expects from the cover.
In spring 2020, several insurers made financial gestures to restaurant owners whose policies excluded or did not address non-damage business interruption caused by the pandemic. With no ex gratia clause in their treaties, those sums stayed mostly on their own account, with no recovery from reinsurers.
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