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I. Background
WRITING TOWARDS the end of the 18th Century, at a time when reinsurance contracts were prohibited in England by statute,' Park J. said "Reassurance, as understood by the law of England,2 may be said to be a contract which the first insurer enters into, in order to relieve himself from those risks which he has incautiously undertaken, by throwing them upon other underwriters, who are called re-assurers."3 Historically there has been some discussion on whether reinsurance actually constitutes a form of liability insurance contract whereby the re-insurance insures the liability of the cédant or is indeed a different specific type of contract that is properly called "reinsurance", the distinguishing feature of which is that the subject matter of the reinsurance is treated as being the same as that of the original insurance.
In England, Lord Mansfield answered that question 200 years ago: ". . . a reinsurance, . . . consists of a new assurance, effected by a new policy, on the same risk which was before insured, in order to indemnify the underwriters from their previous subscription and both policies are in existence at the same time."4 Lord Hoffman affirmed this recently in Charter Reinsurance Co Ltd v. Fagan:' ". . . Contracts of reinsurance were unlawful until 1864. Such contract [of reinsurance] is not an insurance of the primary insurer's potential liability or disbursement. It is an independent contract between reinsured and reinsurer in which the subject matter of the insurance is the same as that of the primary insurance, that is to say, the risk to the ship or goods or whatever might be insured. The difference lies in the nature of the insurable interest, which in the case of the primary insurer arises from his liability under the original policy ...."
In other words, even a perfectly proportional facultative reinsurance is not an insurance against liability, and ipso facto not one against any liability which the reinsured may incur under his own insurance. Accordingly, one of the perennially vexed questions which arises in reinsurance is the extent to which a reinsurer is liable to pay the losses suffered by the reinsured.
"In proportional reinsurance the reinsurer or reinsurers accept a specified percentage of the risk and receive the same...