What is a cut through clause?
A "cut-through" clause is a provision often included in insurance agreements, particularly in situations where there are multiple insurers involved. This clause provides a direct and immediate path for a third-party beneficiary (typically the insured) to receive payments from the reinsurer or retrocessionaire in the event of a primary insurer's insolvency or failure to meet its obligations.
How it Works:
Inclusion in Reinsurance Agreement:
The cut-through clause is incorporated into the reinsurance agreement between the primary insurer and the reinsurer.
Direct Payment Authorization:
The cut-through clause authorizes the reinsurer or retrocessionaire to make direct payments to the insured (or another designated party) in the event of the primary insurer's insolvency or failure to fulfill its obligations.
Insolvency Trigger:
The cut-through clause is typically triggered by a specific event, such as the primary insurer's insolvency or failure to meet its payment obligations.
Direct Relationship:
By including a cut-through clause, the insured establishes a direct legal relationship with the reinsurer, allowing for direct payments in specific circumstances.
Sample Cut-Through Clause:
"Cut-Through Clause: In the event of the insolvency of the primary insurer or its failure to fulfill its payment obligations, the reinsurer agrees to make direct payments to the insured, and the insured hereby consents to and accepts such direct payments from the reinsurer. This clause shall be effective upon the occurrence of [specified triggering event]."
These sample clauses provide a simplified overview, and the actual language and terms may vary based on the specific agreements and legal requirements applicable to the insurance contracts involved.
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