Ex-Gratia Payments Clause
The ex-gratia payments clause governs whether and to what extent voluntary goodwill payments made by the cedent without legal liability are also shared by the reinsurer.
- Clause type
- Claims provision
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
Cedents sometimes make payments to policyholders for customer relations or reputational reasons even though there is no legal liability to pay (ex gratia). Since reinsurance in principle only shares the contractually owed indemnity, the clause clarifies whether and how such goodwill payments feed into the reinsurance account.
Effect and limits
Market practice is either to exclude ex-gratia payments from reinsurance cover entirely, or to require the reinsurer’s prior consent before payment so that it can decide whether to participate. Without the clause, uncertainty exists as to whether follow the fortunes also covers voluntary payments – the prevailing view is that it does not, absent legal liability.
Negotiation and practice
Cedents with a strong interest in customer retention sometimes negotiate a limited allowance of goodwill payments not requiring prior consent, so they can act quickly in individual cases without seeking approval each time.