A valid cut-through provision allows an individual or entity that is not a party to the contract with the reinsurer (i.e., the insuredemployer) to have direct rights against
the reinsurer in the event that the insurer becomes insolvent. Cut-through provisions may take the form of a specific clause, an endorsement attached to the insurance
policy, the reinsurance agreement or both, or a separate agreement between the insured and the reinsurer.
The intention behind a reinsurance cut-through is to replicate a direct contractual relationship between the reinsurer and the ultimate insured. If the relevant legal system gives effect to the cut-through, then in the event that the policyholder’s insurance company is placed into liquidation, the policyholder is able to “cut through†the insurance company and receive payment directly from the reinsurer of the insolvent insurance company.
Without a cut-through, or where the cut-through is unenforceable, the proceeds from any reinsurance policy fall into the general pool of assets making up the insolvent insurers estate, commonly referred to as the general assets of the insurer. This is because the standard insolvency clause included in virtually every reinsurance contract provides that the reinsurer must pay the reinsurance proceeds to the liquidator based on the liability of the ceding company, regardless of whether the liquidator has paid or ever will pay the claim.
In these circumstances the policyholder is likely to receive only a pro rata share of the general assets of the insolvent insurer without any direct access to the reinsurance proceeds.
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Courtesy SNR Denton.com
