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📋 '''Deed of novation''' is a tripartite legal instrument that extinguishes an existing contract between two parties and simultaneously replaces it with a new contract on identical (or agreed modified) terms between one of the original parties and a new counterparty. In insurance, novation is a fundamental mechanism for transferring [[Definition:Insurance policy | policy]] obligations, [[Definition:Reinsurance | reinsurance]] contracts, or [[Definition:Binding authority agreement | binding authority agreements]] from one entity to another — for example, when an [[Definition:Insurance carrier | insurer]] undergoes a corporate restructuring, when a [[Definition:Lloyd's syndicate | Lloyd's syndicate]] transfers its liabilities to a successor, or when an [[Definition:Managing general agent (MGA) | MGA's]] delegated authority is reassigned from one capacity provider to another. Unlike an assignment, which transfers rights only, a novation transfers both rights and obligations, releasing the outgoing party entirely.

⚙️ Executing a novation in the insurance context requires the consent of all three parties: the outgoing party (the transferor), the incoming party (the transferee), and the remaining original party — which is often the [[Definition:Policyholder | policyholder]], [[Definition:Cedant | cedant]], or [[Definition:Reinsurer | reinsurer]] on the other side of the contract. This tripartite consent requirement is both the instrument's strength and its practical challenge. In a [[Definition:Portfolio transfer | portfolio transfer]] involving thousands of [[Definition:Policyholder | policyholders]], obtaining individual consent from each one may be impractical, which is why many jurisdictions — including the United Kingdom under Part VII of the Financial Services and Markets Act and several EU member states — have created statutory transfer mechanisms that achieve the economic effect of novation through court-sanctioned schemes. Where statutory shortcuts are unavailable, the deed of novation must be executed policy by policy or contract by contract. In [[Definition:Reinsurance | reinsurance]], novation is commonly used when a reinsurer exits a market and transfers its treaty portfolio to another carrier, requiring the [[Definition:Cedant | cedant's]] agreement for each contract.

💡 The commercial significance of novation in insurance cannot be overstated. It is the cleanest way to ensure that an outgoing party is fully discharged from future [[Definition:Claims | claims]] obligations, regulatory reporting duties, and [[Definition:Solvency | solvency]] requirements associated with a book of business. For the incoming party, the deed creates a direct contractual relationship with the counterparty, avoiding the credit and enforcement ambiguities that can arise from mere assignment or assumption agreements. For the remaining party — whether a [[Definition:Policyholder | policyholder]] relying on the financial strength of its insurer or a [[Definition:Cedant | cedant]] depending on [[Definition:Reinsurance recoverables | reinsurance recoverables]] — the novation substitutes one obligor for another, making the creditworthiness and regulatory standing of the transferee a matter of acute concern. Regulators across jurisdictions — from the [[Definition:Prudential Regulation Authority (PRA) | PRA]] to the [[Definition:Monetary Authority of Singapore (MAS) | MAS]] — closely scrutinize novation transactions to ensure [[Definition:Policyholder | policyholder]] protection is maintained, often requiring advance notification or formal approval before the deed takes effect.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Portfolio transfer]]
* [[Definition:Assignment]]
* [[Definition:Part VII transfer]]
* [[Definition:Deed of release]]
* [[Definition:Reinsurance]]
* [[Definition:Binding authority agreement]]
{{Div col end}}

Definition:Deed of novation - Revision history

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