Co-insurance: What is the driver allowed to do?
The article was first published on February 10 in Versicherungsmonitor.
When covering major risks, mainly in the area of industrial property insurance, it is common practice to cover the risks through so-called open co-insurance by several insurers. Despite its great practical significance, the internal relationship between the insurers resulting from joint coverage is often only rudimentarily regulated. It remains unclear what specific powers the leading insurer has. A ruling by the Hanseatic Higher Regional Court provides greater clarity and strengthens the role of the leading insurer.
In open co-insurance, the policyholder concludes several independent but interrelated contracts with several insurers, whereby the risk to be insured is distributed among several insurers. The insurers involved are therefore not jointly and severally liable, but only liable for their respective share of the risk, which is usually expressed in quotas.
However, to avoid the policyholder having to deal with all the insurers involved in the co-insurance individually, the insurers usually enter into a lead agreement among themselves, whereby one of the insurers is assigned the role of lead insurer. In order to take into account the policyholder's interest in a speedy settlement of the claim, the lead insurer is responsible for managing the contract and fulfilling the contractual obligations towards the policyholder. The powers to be vested in the lead insurer vary and are sometimes only rudimentarily regulated, which can lead to disputes.
Disputes between co-insurers
This was also the case in the ruling of the Hanseatic Higher Regional Court (judgment of January 7, 2025, ref. 9 U 37/20), in which the lead insurer of a co-insurance group claimed reimbursement of insurance benefits paid out from one of the co-insurers.
The plaintiff and the defendant, together with other insurers, were co-insurers in a guarantee and business interruption insurance policy in which the role of lead insurer was assigned to the plaintiff. The relevant lead clause stipulated that the declarations made and agreements entered into by the lead insurer were binding on the co-insurers, with a few exceptions, such as changes to the amount of the sums insured or the termination provisions.
On the basis of its assigned role as lead insurer, the plaintiff settled several claims by concluding a settlement with the policyholder. It undertook to pay a settlement amount of EUR 15 million. After the plaintiff had made the settlement payment in advance, it requested the co-insurers to pay their respective shares of the settlement amount. With the exception of the defendant, all co-insurers paid their respective shares to the plaintiff.
Hanseatic Higher Regional Court strengthens the role of the leading insurer
In the subsequent legal dispute, the plaintiff initially asserted before the Regional Court and then before the Higher Regional Court of Hamburg that, as the leading insurer, it was entitled to a contractual compensation claim against all co-insurers, and thus also against the defendant, under the provisions of the leadership agreement agreed upon for the internal relationship between the co-insurers.
The Hanseatic Higher Regional Court took the view that, as the leading insurer, the plaintiff had a contractual claim for performance under the internal management agreement for payment of the defendant's share of the settlement amount it had advanced. The management agreement established an obligation on the part of the co-insurers to participate in accordance with their share in the fulfillment of agreements concluded by the leading insurer within the scope of its legal authority to settle the insurance claim with the policyholder.
It follows from the management clause that the declarations made by the leading insurer and the agreements concluded by it with the policyholder are effective without the consent of the co-insurers. This is because it is essential for the functioning of co-insurance that each co-insurer is reliably liable for its own share. With the lead clause, the co-insurers had therefore largely relinquished their powers of co-determination and control with regard to the settlement of an insurance claim and had granted the lead insurer extensive powers.
Since the plaintiff had remained within the scope of its legal rights under the management clause when concluding the settlement with the policyholder, the court ordered the defendant to pay its share of the settlement amount in accordance with its share of the risk.
Conclusion
The ruling of the Hanseatic Higher Regional Court provides greater clarity regarding the scope of the powers transferred to the leading insurer and strengthens the role of the leading insurer. Depending on the terms of the lead arrangement, the leading insurer also has extensive freedom of action in the settlement of claims with effect for its co-insurers.
However, given the diversity of lead arrangements in practice, the relationship between co-insurers should not be defined superficially, but rather in an agreement that specifies the rights and obligations of the co-insurers. This is because a clear division of roles can prevent subsequent disputes over competence.
