A PI cut-through clause is a contractual provision that allows the insured to recover directly from a reinsurer if the primary insurer becomes insolvent or fails to pay. The clause “cuts through” the normal reinsurance chain, which otherwise restricts the insured to recovery from the insurer alone.
What a cut-through clause is
Reinsurance is normally a contract between insurer and reinsurer. The policyholder has no direct rights against the reinsurer; if the insurer becomes insolvent, the policyholder claims as an unsecured creditor in the insolvency and may rely on the FSCS where eligible. The reinsurance asset belongs to the insolvent insurer’s estate, not directly to the policyholder.
A cut-through clause changes that. It is a written agreement — usually in the reinsurance contract, sometimes paired with an endorsement to the underlying policy — that the reinsurer will pay the insured directly in defined circumstances. The most common trigger is insolvency of the cedant insurer.
In UK PI, cut-through is most commonly seen on large risks where the policyholder wants additional balance-sheet certainty above what FSCS provides, and on certain solicitor and surveyor risks where regulators or counterparties have historically demanded direct reinsurance recourse. The clause’s legal effectiveness depends on careful drafting and on insolvency-law rules that have not always favoured cut-through arrangements.
How a cut-through clause works
Four elements shape how the clause operates.
Drafting and contractual structure. Effective cut-through usually involves both the reinsurance contract (in which the reinsurer agrees to pay the insured direct) and the underlying PI policy (in which the insurer notes the right). Some structures use a side letter or specific endorsement. The legal aim is to ensure the reinsurer’s payment to the insured is not vulnerable to the cedant’s liquidator clawing it back as a preference.
Trigger. Typically the insolvency of the cedant — winding-up, administration, scheme of arrangement under Part VII of the Financial Services and Markets Act 2000. Some clauses also trigger on non-payment by the cedant after demand.
Mechanism of payment. When triggered, the reinsurer pays the insured up to the reinsured share of the claim, with the cedant’s claim against the reinsurer extinguished pro tanto. The clause should make clear that payment to the insured discharges the reinsurer.
Limit and scope. Cut-through usually applies only to the reinsured share, not to the cedant’s net retention. The insured’s recovery from the reinsurer is therefore partial, with the balance recovered (if at all) from FSCS or as an insolvency dividend.
Worked UK example
A national IFA network has a £15m PI tower for its advice business. The £10m xs £5m layer is written by Insurer Q and reinsured 70% with two A-rated reinsurers under a treaty containing a cut-through clause triggered by Q’s insolvency.
A series of unsuitable-advice claims against the network produces aggregated indemnity demand of £12m, mostly hitting Insurer Q’s layer. Insurer Q is paying out under its policy but its overall financial position is deteriorating. The PRA places Q into administration mid-claim.
Without cut-through, the IFA network would face: (a) claim against Q’s estate as an unsecured creditor; (b) FSCS recovery up to the FSCS limit per eligible claimant; (c) recovery from layers below and above Q if those policies cover any shortfall (rare); (d) the network’s own balance sheet for the rest.
With cut-through, the 70% reinsured share of Q’s outstanding liability — circa £4.9m — can be claimed directly from the two reinsurers. The network still has to claim the remaining 30% from FSCS and the insolvency estate, but the cut-through reduces the gap significantly and accelerates payment.
The structure works only if the cut-through is enforceable in Q’s insolvency. UK courts have, in some cases, treated cut-through as a permissible direct payment if properly documented and not amounting to a forbidden preference. Drafting matters significantly. Reinsurer ratings, contract certainty and the cedant’s insolvency status at the relevant times are also material.
When the clause matters
Cut-through is most relevant in three scenarios.
Very large limits. Where total PI cover is significantly above the FSCS protection threshold per eligible claimant, cut-through reduces the gap between FSCS protection and the contractual cover.
Solvency-sensitive professions. Regulated firms (solicitors via MTC, financial advisers, larger surveyors) whose own clients may suffer if the firm’s PI cover fails to respond have reason to seek cut-through arrangements behind their primary cover.
Cross-border placements. Where a UK insured has reinsurance behind its UK insurer placed with overseas reinsurers, cut-through provides certainty against the cedant’s insolvency in a way that local regulatory regimes do not always supply.
For most small-to-medium PI buyers, cut-through is not standard and not necessary; FSCS provides reasonable protection for eligible claimants. For larger firms with limits well above FSCS thresholds, cut-through is a discussion point with the broker.
Common variations
Cut-through clauses appear in several common forms:
- Insolvency-only trigger. Pays direct on insolvency of the cedant alone.
- Non-payment trigger. Adds non-payment after demand as a trigger, even without insolvency.
- Endorsed cut-through. Endorsement to the underlying PI policy referencing the cut-through right, giving the insured a clearer documentary path.
- Reinsurance fronting structures. Some captive or risk-transfer structures use cut-through to give the ultimate corporate insured direct recourse against the reinsurer behind a fronting carrier.
- Conditional cut-through. Pays the insured only after FSCS and other recovery routes are exhausted, with reinsurance acting as a top-up.
The legal enforceability of cut-through under English insolvency law is the central question and a specialist matter. The clause’s commercial appearance and its enforceability can differ.
Related concepts
- PI treaty reinsurance — where many cut-through clauses sit.
- PI facultative reinsurance — single-risk reinsurance that may also carry cut-through.
- FSCS PI cover — the statutory protection that cut-through supplements rather than replaces.
- PI claims control clause — separate but related reinsurance-to-claims mechanism.
- Qualifying insurers (SRA PI) — solicitor-PI sector with its own assignment of risk pool, which interacts with reinsurance failure scenarios differently.
Frequently asked questions
What is a PI cut-through clause?
A contractual provision allowing the insured to recover directly from a reinsurer if the primary insurer becomes insolvent or fails to pay, bypassing the normal indirect chain.
Is cut-through enforceable in English law?
Yes, if properly drafted, although enforceability in the cedant’s insolvency depends on whether payment to the insured is treated as a permissible direct payment or as a preference. Drafting and timing matter.
Does FSCS make cut-through unnecessary?
For most small-to-medium PI buyers, FSCS protection is adequate for eligible claimants. Cut-through becomes more useful for larger limits well above FSCS thresholds.
Do I have to negotiate the clause myself?
No. Cut-through is negotiated between cedant and reinsurer. As insured, you ask your broker to confirm whether a cut-through exists in the reinsurance behind your cover, and whether it would be helpful given your limits.
Does cut-through give me a direct claim against the reinsurer for everything?
No. It usually applies only to the reinsured share, in defined trigger circumstances. The cedant’s net retention is not covered by cut-through.
Does the reinsurer become my insurer if cut-through is triggered?
No. The reinsurer pays a defined sum direct, but the contractual relationship of insurance remains between you and the (now insolvent) insurer. You do not gain ongoing insurer obligations toward you from the reinsurer.
Why might an insurer agree to cut-through?
To meet a policyholder demand for additional security, to support placement of large limits, or to satisfy a regulator or counterparty requirement in specific sectors.
Where will I find the clause?
In the reinsurance contract behind your PI policy, and ideally referenced in an endorsement to your policy. Your broker can request confirmation from the insurer.
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About Apex Insurance Brokers Ltd
Apex Insurance Brokers Ltd is a Bristol-based insurance broker authorised and regulated by the Financial Conduct Authority (firm reference number 724952). The company is registered in England and Wales under Companies House number 07014570. Contact: info@apexinsurancebrokers.co.uk | 0117 325 0027.
Last reviewed: May 2026 by Apex Insurance Brokers Ltd.
Important: this article is general information, not advice on your specific circumstances. For advice on PI insurance for your firm, contact us on 0117 325 0027 or info@apexinsurancebrokers.co.uk.