Reinsurance tutorials #24
What is ex gratia payment?
The reinsurance contract specifies the scope of coverage. It usually follows the terms and conditions of the insurance policy. The reinsurance premium was calculated according to the risk and coverage extent; so the exposure of the Ceding party regarding its policies and portfolio.
Sometimes, a Ceding party may be tempted to go beyond its contractual duties toward the insured or the claimant; it will accept to pay a claim or to pay above what is determined by the insurance policy. In doing so, he awards an ex gratia payment.
“Ex gratia” comes from Latin; it means “doing a favour”. The insurer decides to make a voluntary payment or settlement of the claim.
When the insurer settles ex gratia, it may commit the Reinsurer indirectly, if the Ceding party sees an interest in doing so (for commercial or reputation reasons). That is the reason why a reinsurance contract usually excludes ex gratia payments, which are ex-contractual.
It is not always obvious for a settlement to be qualified as “ex-gratia”. They might be an interpretation of the insurance policy wording or the debates on the extent of damages under insurance coverage. To avoid long Court procedures with uncertain outcomes, the Ceding party may decide to compromise and settle the claim partly or in full. Then, it is key for the Ceding party to ask for the previous agreement of the Reinsurer. This will avoid conflicts.
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