In multi-million dollar transactions, you may be asked to obtain reinsurance. This request may come from either the underwriter itself, or
from a lender or borrower to the insured.
Reinsurance involves the laying off of a particular risk from one underwriter to another. For instance, if Company A issued a policy in the amount of $25 million, and either decided or was requested to only retain $10 million of this liability, Company A would reinsure $15 million with Company B or additional companies. Assuming Company A retained the original $10 million as primary liability, Company A would be responsible for the first $10 million of any title insurance claims. Beyond that amount, Company B or other reinsuring companies would be responsible for their proportionate share of the loss. The practice of reinsurance enables title insurance companies to spread risk among many players. This enables them to avoid a scenario whereby one company takes an extremely large claim loss and is rendered financially insolvent or crippled.
Reinsurance is arranged among the various underwriting companies. Typically, the underwriter has an internal limit above which they will require that all risks be reinsured. Likewise, certain lenders and borrowers have established limits over which they will not accept a policy from a particular underwriter without reinsurance.
Reinsurance coverage is provided by means of a Reinsurance Agreement executed by the various underwriters involved in the transaction. Copies of the Reinsurance Agreement are then forwarded to the insureds. The present form of the Reinsurance Agreement contains an automatic direct access provision. This enables the insured to bring an action against any reinsurer. The insured need not exhaust all its remedies against the original insurer before being able to proceed against any reinsuring companies. Almost all lenders will now request that the Reinsurance Agreement contain this direct access provision.
As mentioned above, reinsurance arrangements are handled internally among the various underwriting companies. There is a fee charged from one company to the other to assume the underwriting risk. Typically, this premium is deducted from the gross premium of the transaction before calculating the agent's split.
Underwriting a policy that involves reinsurance becomes much more difficult. While the original company may be willing to take certain underwriting risks, the reinsuring entities may not be so flexible. Therefore, transactions involving reinsurance must be closely underwritten with the assistance of the local office. Any unusual or high risks must be clearly and completely disclosed at the outset. The various title insurance companies all rely on one another's honesty and integrity in purchasing and selling reinsurance.
Internal and external limits are constantly fluctuating among the various companies and entities involved. If you become involved in a multi-million dollar transaction and have any questions as to whether or not reinsurance will be required, please contact the local office.