Every insurer has a limit to the risk that he can undertake. If at any time a profitable venture comes, the insurer may insure it even if the risk at hand is beyond his capacity. In order to safe guard his own interest, he may insure the same risk partially or fully with other insurers, usually bigger companies. This arrangement is known as re-insurance.
Re-insurance can be effected in all types of insurance. It is done to spread risk. In this contract, the re-insurer is liable to pay the loss to the re-insured only if the original has paid the amount of loss to the insured. However the reinsurer is not liable to the insured because there is no privity of contrat between them.
Re-insurance is subject to all the conditions existing in the original policy between the insured and the insurer and the re-insurer is entitled to all the benefits which the original insurer is entitled to under the original policy. Therefore if the original policy is terminated for any reason, the policy of reinsurance also comes to an end.
DOUBLE AND OVER_INSURANCE
Double insurance does take place where the same subject matter and the same risk is insured with more than one insurer. It is different from over insurance which occurs where the amount insured and contained in the policy is more than the actual value of the subject matter insured.
Because a contract of insurance is one of indemnity, double or over insurance has no value in the case of fire and marine insurances because they are contracts of indemnity to mean replacement of actual loss. The only value of double insurance is that when one insurer becomes insolvent, the insured can still make his claims from the other solvent insurers
It is important to note that the question of double or over-insurance does not arise in the case of life insurance because life is priceless.