Definition:Intermediary clause
📋 Intermediary clause is a contractual provision found in reinsurance agreements — and occasionally in primary insurance contracts — that designates the broker or intermediary as the conduit through which premiums and claims payments flow between the cedant and the reinsurer. Often referred to as a "broker clause" in London and Bermuda markets, this provision typically stipulates that payment of premium to the intermediary constitutes payment by the cedant, and that payment of claims to the intermediary constitutes payment by the reinsurer — effectively placing the credit risk of the intermediary's insolvency on different parties depending on the direction of the cash flow.
⚙️ The practical operation of the intermediary clause creates a legal fiction that has significant financial consequences. Under the version most commonly seen in the U.S. and London reinsurance markets, once the cedant pays its premium to the broker, the cedant's obligation is discharged even if the broker fails to forward the funds to the reinsurer. Conversely, the reinsurer's claims payment obligation to the cedant is satisfied only when the cedant actually receives the funds — meaning that if the broker collects a claims payment from the reinsurer but becomes insolvent before passing it on, the reinsurer may be required to pay again. This allocation of risk reflects the historical reality that it is typically the reinsurer who selects and appoints the broker. However, intermediary clause structures differ across markets: in some Continental European and Asian jurisdictions, statutory rules or market practice may impose different risk allocations, and not all reinsurance contracts include such a clause. Where an intermediary clause is absent, general principles of agency law govern the question of when a payment is deemed received.
🛡️ The significance of this clause extends well beyond legal technicality. It directly affects how parties manage counterparty risk and structure their cash flow operations. Cedants benefit from the protection that paying the broker satisfies their premium obligation, while reinsurers bear greater exposure to broker default on the claims side. The intermediary clause also influences how regulators think about client money protections and broker licensing requirements — the Lloyd's market, for example, has specific rules around the handling of funds in the broker channel. In an era of increased attention to operational risk and concentration in the broking market — where a handful of global firms such as Aon, Marsh, and WTW handle a large share of reinsurance placements — the intermediary clause remains a cornerstone of how risk and trust are allocated in the reinsurance value chain.
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