This commentary initially notes that custom and usage is defined in the Uniform Commercial Code as a “practice or method of dealing having such regularity of observance in place, vocation or trade as to justify the expectation that it will be observed with respect to the transaction in question.”

In normal commercial practice, custom and usage serves as an interpretive aid in construing contracts in limited circumstances: where contract terms are ambiguous, and need to be defined in their proper commercial context, and secondly, “to add terms to the agreement where the contract is silent as to a particular issue, particularly where the term is essential to the agreement.”

Reinsurance contracts have been treated differently because of their informal nature. In fact, one commentator has gone so far as to say that “[t]he special and unique nature of reinsurance arrangements makes it imperative that a court consider industry custom and practice in interpreting reinsurance contracts…” Thus, custom and usage has been viewed—at least by some—as the essential backdrop in interpreting reinsurance contracts, instead of an interpretive aid to be used in limited circumstances.

This commentary notes, however, that as economic forces within the reinsurance industry have pushed parties “away from informal expressions of their agreements, and toward more complete writings,” courts have moved firmly in the direction of interpreting reinsurance contracts as they would normal commercial contracts. This has meant restricting custom and usage to instances where reinsurance contracts have ambiguous terms, or lack terms that would be deemed to be part of reinsurance agreements under the custom and usage prevailing in the industry.

In the last decade, “courts have consistently said that they treat reinsurance contracts like any other commercial contract,” and as the weight of these precedents accumulate, “they create a body of law that has its own momentum…that makes it increasingly difficult for a litigant to argue that reinsurance contracts should have their own specialized interpretation rules.”

Accordingly, this commentary warns that both litigants and drafters of reinsurance contracts need to understand and apply this convergence between normal commercial law and reinsurance law. “[L]itigants cannot assume that reinsurance contracts will be treated as special and unique, with a favored place for trade usage.” Drafters of reinsurance contracts “…should not assume that brevity of expression will be cured either by mutual good will of the contracting parties or by the wisdom of a court delving into trade usage in the reinsurance industry.”

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