DEFINITION of Hourly Clause
An hourly clause, also known as an hours clause, is a provision in a reinsurance contract requiring the time at which a loss occurs to be reported, and sometimes restricting coverage to a certain time frame. Hourly clauses are most commonly found in catastrophe reinsurance property policies.
BREAKING DOWN Hourly Clause
An hourly clause is one of the specific contract terms reinsurers use to limit coverage and reduce their exposure to losses (it is not usually a separate clause in a reinsurance contract, but included as part of the Occurrence definition). In a reinsurance contract, the reinsurer agrees to indemnify the insurer up to a loss limit in exchange for a portion of the premium that the insurer collects through its underwriting activities. Reinsurers examine the potential frequency and severity of claims and the likelihood that a loss will occur, and build that into pricing and risk models. In the case of catastrophe reinsurance, the intermittence and unpredictability of natural catastrophes can make modeling difficult, and in response to this reinsurers often include terms that limit the scope of coverage.
These terms narrow the definition of what types of catastrophes are covered by, for example, defining catastrophes as those caused by natural and not man-made means. In this case, a naturally occurring earthquake will trigger coverage but an earthquake triggered by drilling a well would not. The terms may also limit the geographic area in which losses are covered by indicating, for example, that earthquake coverage is only applicable in California and not Washington. They may also include hourly clauses.
Reinsurers use hourly clauses to narrow the amount of time after a catastrophe occurs that damage will be covered. This limits the amount of time that losses will be accepted relative to the time an insurable event occurs. For example, an hourly clause may indicate that only damages sustained within four hours of an earthquake are covered by the reinsurance contract. Typically, the time period is fixed at 72 or 168 hours (although longer periods are becoming increasingly common).
Hourly Clause: Restrictive or Expansive?
Determining the time that a loss occurs relative to an insurable event can be difficult, especially if losses are widespread. While reinsurers like to limit their exposure through hourly clauses, insurance companies often view such terms as onerous and will seek out reinsurers who are willing to exclude this type of term from a reinsurance treaty.
But an hourly clause isn't always restrictive. In some instances, it might allow a reinsured to aggregate multiple losses so as to recover from its reinsurers where otherwise this might not have been possible (owing to the particular excess level in a contract, for example).