Clear and unambiguous wording of trigger clauses in ILS contracts is vital to their success, says Clive O’Connell of McCarthy Denning.
When a lawyer looks at an ILS contract wording, the first clauses that she or he ought to review are the law, jurisdiction and dispute resolution clauses. From these, a lawyer can determine how the rest of the contract should be read and interpreted, and even whether he or she is qualified to interpret it.
Once the manner of interpretation has been resolved, the next clause that should be subject to scrutiny is probably the trigger mechanism. This is the clause that is most likely to come under scrutiny if a claim arises and is the most vulnerable to a potential dispute. Disputes are most likely to occur when a potential claim is made, and the trigger mechanism will be central to the question of whether a claim can properly be presented.
Trigger clauses can—and should—be simple. Experience from reinsurance agreements, however, demonstrates that simplicity is occasionally difficult to obtain. In natural catastrophe reinsurance covers, hours clauses were developed to avoid many complexities but even today, issues can still arise with regard to the operation of those clauses. In liability reinsurance, the identification of an “event” has long presented a difficulty.
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