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Reinsurance Contracts: Reconciling “The Claims Co-Operation Clause” And “Follow The Settlement Clause”

Reinsurance is essentially insurance that a reinsurance company (reinsurer) undertakes to assume the risks of another insurance company (reinsured/primary insurer) for insurance policies they undertook with their customers (principal insured).

Reinsurance facilitates the spreading of risk or financial exposure from the principal insurer to other reinsurers to enable them the possibility of underwriting larger risks.

In the recent decision of Chubb Insurance Malaysia Bhd (dahulunya dekenali sebagai Ace Jerneh Insurance Bhd) v Allianz General Insurance Company (Malaysia) Bhd [2024] MLJU 750, the Court of Appeal explored and reconciled the interpretative conflict between the Claims Co-operative Clause and Follow the Settlement Clause.


Brief Facts


The Respondent (Allianz) was the lead insurer under a Machinery Breakdown Insurance Policy (Policy) covering Prai Power. Allianz assumed 55% of the risk, with the remaining risk undertaken by co-insurers. Allianz then ceded out part of the risks to various reinsurers, including the Appellant (Chubb), where Chubb assumed 6% of the risk under the reinsurance contract.


In 2015, Prai Power suffered damage to the compressor of its gas turbine, causing a forced outage, which resulted in a loss to Prai Power. Prai Power then made a claim on the Policy. Investigations and reports from the adjusters and legal opinion from a Singapore legal firm point to Allianz being liable to Prai Power’s claim under the Policy.


Hence, Allianz notified the reinsurers that it decided to settle the said claim and made cash calls for reinsurers to pay their respective shares of the settlement sum under the said Policy (Settlement).


Chubb refused to pay on the ground that Prai Power’s claim did not fall within the ambit of the Policy and Allianz had failed to act in a proper and business-like manner in the investigation, negotiations and settlement of the claim. This prompted Allianz to institute legal proceedings against Chubb at the High Court to recover the 6% share of the Settlement, which was allowed. Dissatisfied with the decision of the High Court, Chubb filed an appeal at the Court of Appeal.




The appeal concerns two operative clauses in the reinsurance contract, namely, Follow the Settlement Clause (FTSC) and Claims Co-operative Clause (CCC).

FTSC is a clause that binds the reinsurer to any settlement made between the principal insurer and the principal insured, whereby the reinsurer is bound to indemnify the reinsured in respect of any settlement made. The purpose of a FTSC is to promote the efficient and expeditious settlement and pay out of the settlement sum by minimising disputes.


However, on the flip side, it would be impossible for a reinsurer to ascertain if the settlement made by the reinsured was done in good faith. As such, a CCC was introduced to allow the reinsurer to exercise a degree of control over the reinsured. A CCC may require the sharing of information and co-operation between the reinsured and the reinsurer or require the reinsured to obtain the reinsurer’s consent before a settlement of a claim is made under the underlying policy.


In this case, Chubb argued that the CCC takes precedence over the FTSC. As such, it should be treated as a condition precedent before Allianz can rely on the FTSC and make cash calls for Chubb to pay its share of the Settlement. Further, Chubb argued that Allianz has breached its obligation under the CCC as Allianz did not co-operate with Chubb in the investigation, adjustment and settlement of the claim. Chubb also argued that Allianz did not act honestly or in proper and business-like manner when it processed and allowed the claim.


In response, Allianz’s contention is that the CCC was not a condition precedent as it was not expressly provided in the reinsurance contract. As such, Allianz’s right to rely on the FTSC was not conditional upon the compliance of the CCC. In any case, Allianz contended that it did not breach the terms of the CCC.




The question before the Court of Appeal was whether the FTSC or CCC would take precedence over one another in the said reinsurance contract between Allianz and Chubb?


It was held that the answer would vary from case-to-case, depending on the express words used in the reinsurance contract and on the true and proper construction of the FTSC and CCC. In interpreting the CCC and FTSC, the court must look at the intention of the parties to determine whether the former will take precedence over the latter and vice versa.


The Court of Appeal examined several cases from the United Kingdom (UK) involving similar disputes, namely The Insurance Co of Africa v Scor (U.K.) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312, Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2002] EWHC Civ 248, and Eagle Star Insurance Co Ltd v JN Cresswell and others [2004] 2 All ER (Comm) 244. In these UK cases, it was held that a CCC takes precedence over the FTSC and the reinsurer was only required to follow the settlement to which they had consented to.


However, in the present case, the Court of Appeal found that the CCC was worded differently from the UK cases cited above. The Court of Appeal found that the CCC in this appeal was not a condition precedent for the following reasons:

a)    The CCC was not expressed to be a condition precedent and does not require Allianz to obtain prior approval or consent from reinsurers to settle the claim.


b)    Allianz as the principal insurer was entitled to settle the underlying claim and was only required to keep the reinsurer informed of the same.


c)     Chubb had no right to control or be directly involved in the claims process, negotiations and settlement process.


d)    The CCC does not provide that Allianz must comply with the CCC before it can exercise the FTSC.


Accordingly, for these reasons, the court held that it was not the intention of the parties for the CCC to take precedence over the FTSC.


The Court of Appeal held that Allianz was entitled to recover from Chubb its share of the Settlement under the FTSC as Allianz had acted with utmost good faith, in a proper and business-like manner when processing and reaching a settlement of the claim:


a)          Allianz had duly notified the reinsurers when the claim was made and kept them informed of the status of the said claims throughout.


b)          Allianz appointed international loss adjusters with substantial experience to investigate into the loss, experienced technical consultants to conduct investigations into the root cause of the damage and experienced legal advisors with substantial expertise and reputation to provide legal opinion on the policy liability.


Key Takeaways

Reinsurance is a vital part of the insurance machinery by mitigating and spreading out risks in the global economy, which facilitates the growth and continuity of businesses in the face of uncertainties.


The presence of the CCC and FTSC regulates the relationship between reinsurer and reinsured. Whether one may take precedence over the other would depend on the express words of the said clauses adopted in the reinsurance contract. Parties are at liberty to limit the scope, applicability and effect of a FTSC or CCC as they deem fit, but it is imperative that these provisions be spelt out in clear and unambiguous terms to reflect their intention.

9 May 2024


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