Ultimate Net Loss Clause
The ultimate net loss clause defines which amounts – the principal loss, claims expenses and recoveries from other cover – are taken into account when calculating the net loss recoverable under a reinsurance treaty.
- Clause type
- Definition
- Origin/Market
- Reinsurance market
- Favours
- Neutral
- Negotiability
- Market standard
Purpose
So that cedent and reinsurer apply the same figure as the relevant loss, the clause exhaustively defines the term “ultimate net loss”: the amount actually paid or payable by the cedent, including attributable claims settlement expenses, reduced by all recoveries from subrogation, salvage or other, prior reinsurance.
Effect and limits
The precise definition determines whether and to what extent legal, expert and internal handling costs are included in the recoverable loss amount, and in what order other layers of cover (retention, other reinsurance layers) must be applied before the treaty in question. Absent a precise definition, multi-layer programmes regularly give rise to settlement disputes.
Negotiation and practice
Whether external and internal claims handling costs (loss adjustment expenses) are included in full, proportionally, or not at all, is a key negotiation point that materially affects the effective level of cover.