Sunset Clause
The sunset clause sets a time bar after which losses under a terminated or lapsed reinsurance contract may no longer be notified or claimed.
- Clause type
- Termination
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
Without a time limit, a reinsurer could theoretically face late-developing claims decades after a treaty has ended, particularly in long-tail lines such as liability or environmental risk. The sunset clause sets a fixed period (often several years after expiry) beyond which no further claims may be made under the treaty, regardless of when the underlying loss actually occurred.
Effect and limits
The clause creates planning certainty and allows the reinsurer to finally release reserves for the treaty. For the cedent it creates a residual risk: losses that only become known after the deadline remain entirely on its own account. The clause therefore sits in tension with the principle of comprehensive cover.
Negotiation and practice
The length of the period is usually set according to the typical development pattern of the line of business; shorter periods are common for short-tail lines such as property than for liability or environmental exposures. Cedents sometimes negotiate exceptions for losses already known but not yet finally quantified.