Extra-Contractual Obligations (ECO) Clause

What Is an Extra-Contractual Obligations (ECO) Clause?

An extra-contractual obligations (ECO) clause in a reinsurance contract requires a reinsurer to pay for expenses imposed upon the ceding insurer by regulatory, judicial, or legislative organizations. An extra-contractual obligation (ECO) clause explicitly applies to losses that are outside of the insurance policies covered under a reinsurance treaty.

Seeing Extra-Contractual Obligations (ECO) Clauses

Extra-contractual damages are granted in "dishonesty" claims against insurance companies. They are a form of punitive damages, expected to rebuff extreme insurer conduct. Extra-contractual obligations vary from excess of policy limits (XPL) losses.

Excess of policy limits losses allude to those that outcome from an insurer misusing a insurance claim, and finding itself at risk for the losses over the policy limit. Extra-contractual obligations are not the consequence of misusing a claim, and on second thought are the consequence of negligence, dishonesty, or tricky practices. For instance, an insurer might be found to have participated in tricky sales practices, and be sued by a policyholder for distorting what perils are covered by the policy.

Insurance companies are required to reimburse policyholders against claims made against them. At times, the insurer will fail in its contractual obligation and will act in dishonesty, or might be viewed as careless in its treatment of a claim. Assuming that a court finds that the insurer has acted inadequately, it might impose a penalty. On the off chance that the insurer has a contract with a reinsurer, the reinsurer might be held at risk for these punishments, which are alluded to as extra-contractual obligations.

Insurance companies will regularly utilize reinsurance arrangements to moderate a portion of the risks associated with the policies that they guarantee. Contingent upon the reinsurance treaty language, reinsurers might be responsible not just for losses associated with the policies covered under the contract, yet additionally for fines that the insurer might have imposed against it for negligence by the courts. The reinsurance treaty will show if the reinsurer is responsible for extra-contractual fees, and in the event that it is to be held responsible, under what circumstances it would need to pay for any fines.

Extra-Contractual Obligations Clause Example

While reinsurance agreements will be tailored to the specific policy or indemnity looked for, the clauses included will have comparative boilerplate language, like the accompanying:

This Reinsurance Agreement will safeguard the Company as given in Article 1 Business Covered where the Loss incorporates any Extra Contractual Obligations. The date on which any Extra Contractual Obligation Loss is incurred by the Company will be considered, in all conditions, to be the date of the original Loss. Be that as it may, this Article will not make a difference where the Loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company...