Cut-Through Clause
A cut-through clause gives the policyholder or claimant a direct payment claim against the reinsurer if the primary insurer – typically a fronting company – fails.
- Clause type
- Extension
- Origin/Market
- Reinsurance market
- Favours
- Insured
- Negotiability
- Bespoke
Purpose
A cut-through clause gives the policyholder or claimant a direct payment claim against the reinsurer if the primary insurer – typically a fronting company – fails. Cut-through clauses appear mainly in fronting structures: the policyholder does not want to bear the fronter’s credit risk when, economically, the captive or a strong reinsurer holds the risk anyway.
Effect and limits
The clause breaks the principle that reinsurance operates only in the internal relationship. Its enforceability varies considerably between jurisdictions – particularly in insolvency, where it may conflict with equal treatment of creditors and set-off prohibitions. Local legal opinions are essential for critical programmes.
Negotiation and practice
Where cut-through is not enforceable, security instruments such as trust accounts, letters of credit or rating triggers mitigate counterparty risk. The clause is negotiated individually per programme and is rarely a market standard.