Interest Sharing Clause
The interest sharing clause governs, in excess-of-loss reinsurance, how default or litigation interest arising from a claim is allocated between the primary insurer and the reinsurer.
- Clause type
- Claims provision
- Origin/Market
- Reinsurance market
- Favours
- Neutral
- Negotiability
- Market standard
Purpose
In liability insurance, a claimant may recover default or litigation interest in addition to the indemnity itself, particularly after delayed payment or a dispute over coverage. The interest sharing clause determines whether and to what extent this ancillary claim also falls under an excess-of-loss reinsurance treaty.
Effect and limits
Interest is typically allocated in proportion to the reinsurer’s priority relative to the excess loss – that is, in the same ratio as the reinsurer’s share of the total loss above the agreed priority. Without such a clause, it would remain unclear whether interest claims stay entirely with the cedent or pass proportionally to the reinsurer. Some markets (e.g. Belgium, Greece) apply a similar clause to default interest on motor liability claims.
Negotiation and practice
Because interest claims can grow substantially in protracted liability litigation, a clearly drafted interest sharing clause is practically important for settling accounts between cedent and reinsurer and should be unambiguously worded in the treaty wording.