Claims Co-Operation Clause

A Claims Co-Operation Clause typically found in a reinsurance contract provides:

“Notwithstanding anything herein contained to the contrary, it is a condition precedent to any liability under this Reinsurance that:

• The Reinsured shall, upon knowledge of any circumstances which may give rise to a claim hereunder, advise the Reinsurers immediately and in any event not later than 30 days, and
• The Reinsured shall co-operate with the Reinsurers and/or their Appointed Representatives subscribing to this Policy in the investigation and assessment of any loss and/or circumstances giving rise to a loss.

No settlement and/or compromises shall be made and/or no liability admitted without prior approval of the Reinsurers.”

Reason for Incorporating the Claims Co-Operation Clause

In the Court of Appeal case Rozanes v Bowen, 32 Lloyd’s List L. Rep. 98 (C.A., 1928), Lord Justice Scrutton stated: “It has been for centuries in England the law in connection with insurance of all sorts, marine, fire, life, guarantee and every kind of policy that as the underwriter knows nothing and the man who comes to him to ask him to insure knows everything, it is the duty of the assured… to make a full disclosure to the underwriter without being asked of all the material circumstances.” Lord Justice Scrutton captured the duty of the insured to make a full disclosure to the insurer without being asked individually and how the insurer is inherently shut out from the information held by the insured. It would not be an overstatement that an insurance contract cannot properly function without the sharing of information.

In the insurance market and practice, a Claims Co-Operation Clause is a mandatory and widely used provision; indeed, one is almost always included in a reinsurance contract.

Reinsurers are typically bound by the “follow the fortunes” principle, under which reinsurers follow the claims-handling decisions of the cedant (primary insurer). However, indiscriminately applying the “follow the fortunes” principle would engender grave risks of unforeseen liabilities for reinsurers. Thus, the Claims Co-Operation Clause aims to provide a protective mechanism for reinsurers in monitoring the actions and decisions of the cedant as a pre-emptive safeguard against such risk. If the “follow the fortunes” principle did not exist, the reinsurance business could not operate efficiently. Yet without a Claims Co-Operation Clause, there is a risk that the “follow the fortunes” principle might operate to the unilateral disadvantage of reinsurers. Accordingly, the Claims Co-Operation Clause is a fundamental element that makes the business of reinsurance workable in the first place.

Validity of the Claims Co-Operation Clause Under Korean Law

The insurance chapter of the Korean Commercial Act (KCA) contains the so-called “no adverse change rule”, meaning that insurance policies cannot include provisions that adversely change the Korean insurance law, thereby putting the policyholder at a disadvantage (Article 663). However, the Korean Supreme Court has recognised an exception to the principle of prohibition (Article 663 of the KCA) in cases of corporate insurance contracts, including marine and reinsurance, where the insurer and policyholder negotiate contract terms with equal bargaining power (case no. 2005Da21531). Accordingly, an argument that the Claims Co-Operation Clause in a corporate or reinsurance contract is invalid on the basis of the “no adverse change rule” would not succeed.

This argument – that the principle of prohibition under Article 663 of the KCA does not apply to reinsurance contracts – is critical in a context where the reinsured has failed to obtain prior approval for paying the insurance proceeds (which arose from the insured’s settlement with a third party), despite the obligation to seek the reinsurer’s prior approval under the reinsurance. In other words, whilst Article 723(3) of the KCA provides that an insurer is not exempt from liability if the insured settled with a third party without the insurer’s prior approval unless such settlement was grossly unreasonable, a Claims Co-Operation Clause in a reinsurance contract may validly provide otherwise. In this regard, in principle a reinsurer would be exempt without exception if the reinsured agreed to any settlement or admitted liability without the reinsurer’s prior approval.

The rationale is that parties to a reinsurance contract enjoy freedom to agree to terms which differ from those stipulated in the KCA. Accordingly, a Claims Co-Operation Clause wording that requires the reinsurer’s prior approval for any settlement or compromise is valid and effective under Korean law, and a reinsured would not be entitled to reinsurance proceeds if it has breached the Claims Co-Operation Clause by failing to obtain the reinsurer’s approval prior to making the insurance payment under the original policy.

There are several lower court cases in which the Claims Co-Operation Clause was presumed to be valid and effective: Seoul Central District Court case no. 2018GaDan5227868; Seoul Central District Court case no. 2018GaHap563085; and so forth.

Validity of ‘Condition Precedent’ Terms

Under Korean law, a term that is a condition precedent to liability in insurance is generally recognised as valid and binding (Korean Supreme Court case no. 2004Da28903). Thus, reinsurance contracts are permitted to include provisions that put the reinsured at a disadvantage relative to how it would be under the statutory standard (ie, the KCA). Hence, if a reinsured has violated a condition precedent term, the reinsurer may be exempt from liability. Accordingly, in general terms, if fulfilment of the Claims Co-Operation Clause in a reinsurance policy is a condition precedent to the reinsurer’s liability and the reinsured breached the Claims Co-Operation Clause, in principle the reinsurer would be relieved from liability for the reinsurance claim. For instance, if a Claims Co-Operation Clause required the reinsured to furnish the reinsurer with and keep the reinsurer informed of all information known to the cedant in respect of claims or possible claims notified and the reinsured failed to provide all known information in regard to a circumstance notice, the reinsurer may have a defence to a reinsurance claim.

Whether “Prejudice” is Required

The issue turns on whether a reinsurer’s non-liability requires proof that its rights were prejudiced by the cedant’s breach of a condition precedent to liability. In other words, the question is whether the reinsured’s mere breach of a Claims Co-Operation Clause that is a condition precedent to liability is, in itself, sufficient to discharge the reinsurer, or whether the reinsurer is relieved only if the breach prejudiced the reinsurer’s interests and rights. An example would be a case where the policy requires the insured to give written notice of a claim within 30 days, and failure to do so operates as a condition precedent that exempts the insurer from liability. If the insured fails to give such timely notice, thereby relieving the insurer of liability, the issue then arises as to whether the reinsurer is automatically discharged as well, or whether the reinsurer must demonstrate that it suffered prejudice as a result of the original insured’s breach of the notification requirement under the original policy.

It is understood that, in other jurisdictions, the insurer must demonstrate that it has been prejudiced by the insured’s breach of a condition precedent in order to be discharged from liability (the US case Security Mutual Casualty Co. v Century Casualty Co., 531 F.2d 974 (10th Cir. 1976) is an example). There is sparse Korean court precedent on this point, such that case law from other jurisdictions may provide instructive guidance to Korean courts. However, the existing Korean Supreme Court decision does not require proof of prejudice (case no. 2004Da18903). Therefore, even without demonstrable prejudice, the expectation is that the reinsurer can successfully defend a reinsurance claim based on the cedant’s breach of a condition precedent.

The “Duty to Explain”

The “Duty to Explain” in an insurance context refers to the duty imposed on the insurer to explain to the policyholder the material provisions before signing a contract. “Material provisions” are terms and conditions that are likely to affect the policyholder’s decision to agree to the insurance policy or to the terms themselves (eg, insurance premium rates, subject of duty to notify, bases for policy rescission, and the insurer’s exemption clauses). This Duty to Explain, which is prescribed in the Standardised Contracts Regulation Act of Korea, is intended to protect the policyholder from any disadvantages it may suffer due to its unawareness of a material provision. The significance is that, even if an exemption clause under a policy is triggered, the insurer would be nonetheless liable if the insurer has breached the Duty to Explain at the time of policy inception, and the burden is on the insurer to prove that it has satisfied the Duty to Explain in respect of the exemption clause.

An example would be where a Claims Co-Operation Clause provides, as a condition precedent to liability, that the insured must notify the insurer of any circumstances which may give rise to a claim; as the insured’s duty to notify is a condition precedent to the insurer’s liability and therefore a “material provision”, the insurer would have to prove that it has explained the Claims Co-Operation Clause in order to rely on the insured’s breach of the Claims Co-Operation Clause as a ground for exemption. In practice, it is very difficult for the insurer to satisfy the burden that it has explained the “material terms” to the insured prior to policy inception.

In light of this, a Claims Co-Operation Clause may be rendered null and void if the insurer has breached its statutory duty to explain a material provision, such as the Claims Co-Operation Clause. The Korean Supreme Court has consistently held that terms which are subject to the Duty to Explain may be nullified if the insurer fails to prove that it has satisfied the Duty to Explain in respect of those terms (case no. 2020Da291449, etc).

That said, in reinsurance market practice, the placement of reinsurance is conducted through insurance brokers, and under Korean law insurance brokers are treated as agents of the reinsured. Where the insurance broker who negotiates the reinsurance terms with the reinsurers is aware that the policy terms contain a Claims Co-Operation Clause, the cedant is deemed to have such knowledge as well. Accordingly, the likelihood that the reinsurance contract could be voided on the basis of a breach of the Duty to Explain in regard to the Claims Co-Operation Clause is considered low.

Claims Co-Operation Clause in the Original Policy That is Intended to be Applicable to a Reinsurance Contract

There are many instances under which a Claims Co-Operation Clause applicable to reinsurance has been incorporated into the original policy: “Notwithstanding anything contained herein to the contrary, it is a condition precedent to any liability under this reinsurance that…” It is unclear based on the wording alone why a clause expressly intended to bind reinsurers appears in the original policy. The best guess is that such inclusion was a drafting mistake.

Because reinsurers are not parties to the original insurance contract, a Claims Co-Operation Clause embedded in the original policy cannot bind or be invoked by the reinsurers. This was the conclusion of the Seoul Central District Court in 2025, which held that the inclusion of a reinsurance “Claims Co-Operation Clause” in an original policy resulted from a drafting error and thus the reinsurer, being a non-party to that contract, cannot rely on the Claims Co-Operation Clause (case no. 2022GaHap51852). This decision highlighted the importance of careful wording during policy drafting.