In 2005, ASARCO filed for bankruptcy in the face of increasing liability for asbestos bodily injury claims. In 2009, ASARCO exited bankruptcy and established an Asbestos Personal Injury Settlement Trust (the “ASARCO Trust”) that assumed some of ASARCO’s asbestos-related liability and corresponding insurance rights. ASARCO also pursued insurance coverage for its liabilities, including under the Fireman’s Fund policies. After years of litigation, Fireman’s Fund assessed its exposure under its three policies to be $50.3 million, and it negotiated a settlement of $35 million with the ASARCO Trust in exchange for a release. Fireman’s Fund then sought reinsurance for its payments, and allocated about $13 million to each of the two lower-layer policies that attached at $30 million, and about $8 million to the higher-layer policy that attached at $75 million.
Following the settlement, Fireman’s Fund sought coverage under its reinsurance. The reinsurer for the policy that attached at $75 million, OneBeacon, argued that Fireman’s Fund’s allocation to that policy violated the policy’s exhaustion requirement and the entire settlement should have been allocated to the two lower-layer policies attaching at $30 million. Affirming the district court, the Second Circuit agreed with Fireman’s Fund that it could obtain reinsurance under the higher-attaching policy after allocating about $13 million to each of the lower-level excess policies.
In reaching its decision, the court looked first to the Payment of Loss condition in the Fireman’s Fund policy, which provided that the policy applied “only after all underlying insurance has been exhausted.” The court noted that the Fireman’s Fund policies did not define the term “exhausted,” and explained that the Payment of Loss condition, standing alone, does not unambiguously require actual payment of the policy limits by underlying insurers to trigger coverage. The court referred to its prior decision in Zeig v. Massachusetts Bonding & Insurance Co., which also interpreted an excess policy that did not contain a definition of “exhaustion” and held that the exhaustion requirement as written “did not preclude exhaustion by a below-limits settlement that discharged claims up to the limits of the primary policies.” Thus, the court held that, absent a policy provision that required exhaustion of underlying insurance by actual payment of the underlying limits, a settlement that extinguishes the insured’s liability up to the amount of the underlying insurance policy’s limits suffices to establish exhaustion for purposes of allocation of a settlement under a reinsurance contract.
OneBeacon also argued that exhaustion by actual payment is expressly required by the Limit of Liability provision in the Fireman’s Fund policy, which provided that the policy would provide coverage above reduced limits “in the event of reduction or exhaustion of the applicable aggregate limit or limits of liability under said underlying policy or policies solely by reason of losses paid thereunder on account of occurrences during this policy period . . . .” (emphasis added). The court disagreed with OneBeacon and held that this provision only applied where the underlying aggregate limit of liability had been reduced or exhausted by payment of previous claims and was not relevant where, as here, the insured’s liability far exceeded the policy’s attachment point regardless of erosion.
In light of its holdings, the court concluded that ASARCO faced exposure well in excess of the lower-layer Fireman’s Fund policies’ limits and that Fireman’s Fund’s settlement likely avoided greater exposure to higher-layer policy that attached at $75 million, thereby satisfying the higher-layer policy’s exhaustion requirement. Indeed, if the higher-attaching policy had been the only policy at issue, the insurer would have had to pay some amount in order to obtain a release under it.
Another recent decision considered an excess insurer’s challenge to exhaustion where there was no question that the underlying insurers paid their policy limits in full. In Duke University v. Endurance Risk Solutions Assurance Co., the U.S. District Court for the Eastern District of North Carolina considered the excess insurer’s argument that underlying policy limits were not exhausted because the underlying carriers’ decisions to pay their policy limits was incorrect.
Duke University (Duke) maintained an insurance program with total limits of $80 million for the policy period of January 1, 2015 to January 1, 2016, including management liability coverage on a claims-made basis. Endurance Risk Solutions Assurance Company (Endurance) provided the highest layer excess policy, which had limits of $25 million excess of $55 million, and followed form to the primary layer policy issued by Westchester Fire Insurance Company.
In June 2015, a Duke faculty member filed a putative class action against Duke alleging that a “no poach” agreement between Duke and the University of North Carolina violated the Sherman Act and constituted unfair and deceptive trade practices by suppressing faculty wages and mobility (the “Seaman Action”). Duke reported the Seaman Action to its insurers, including Endurance, and kept the insurers updated throughout the suit including during settlement discussions. The Seaman Action was settled for $54.5 million—below Endurance’s $55 million attachment point—in March 2019 at a mediation in which Endurance participated, Endurance did not object to any settlement offers or underlying insurers’ payment decisions, and did not reserve any rights as to coverage. Following the settlement, Duke advised Endurance that its defense costs for the Seaman Action would reach into Endurance’s layer.
In December 2019, after the Seaman Action was settled, a second Duke faculty member filed a second suit involving claims similar to those in the Seaman Action (the “Binotti Action”). In a series of letters between March 2020 and May 2020, Endurance reserved its rights regarding the Binotti Action and then advised Duke that it believed no coverage was afforded for either the Seaman or Binotti Actions. Duke proceeded to settle the Binotti Action in December 2020 for $19 million of its own funds, and also advanced $500,000 in “settlement costs.”
Duke filed suit against Endurance seeking, among other things, a declaration that Endurance’s policy covered Duke’s liability in the Seaman and Binotti Actions for amounts in excess of underlying insurance. Endurance moved for summary judgment on several grounds, including that the underlying policy limits were not exhausted and Endurance’s layer was not reached. While Endurance did not dispute that the underlying insurers had paid their policy limits in full, Endurance contended that the underlying insurers’ decision to pay or not dispute coverage for the Seaman Action was incorrect.
Noting the absence of any binding case law on the issue, the court held that an excess insurer may not challenge an underlying insurer’s decision to pay its policy limits when deciding whether the underlying limits have been exhausted. The court observed that Endurance’s policy did not contain any provision permitting it to challenge the underlying insurers’ payment decisions. The court also noted that Endurance had not raised any argument that the underlying insurers’ payments were in bad faith or fraudulent. Thus, the court concluded that Endurance could not refuse to provide coverage on grounds that the underlying limits were not exhausted, whether or not the underlying insurers’ decisions to make payment were correct.
Priority Between “True Excess Policies” and Other Insurance
In Century Surety Co. v. Metropolitan Transit Authority, the U.S. Court of Appeals for the Second Circuit held that priority of coverage between a “true excess policy” and other available insurance was dictated by the indemnification provision in the trade contract between the named and additional insureds, and not the “other insurance” provisions in the relevant insurance policies.
In Century Surety, the Metropolitan Transit Authority and Long Island Railroad (collectively, LIRR) hired Rukh Enterprises, Inc. (Rukh) to complete a bridge painting project in Queens, New York. Rukh subcontracted part of the work to East Coast Painting & Maintenance, Inc. (East Coast). An East Coast employee was injured on the project and sued the LIRR and Rukh. The LIRR, Rukh and East Coast’s primary insurers, Admiral Insurance Co. (Admiral), Arch Insurance Co. (Arch), and Harleysville Preferred Insurance Co. (Harleysville), respectively, contributed to a settlement of the action, while Rukh’s excess insurer, Century Surety Co. (Century), did not contribute and disclaimed coverage. Coverage litigation ensued, focused on the priority of coverage between Century’s policy issued to Rukh—a “true excess policy”—and Admiral’s primary policy issued to the LIRR. The coverage suits were consolidated and resolved on summary judgment in favor of Century, as the district court held that Century’s policy was not liable to tender payment until the other available insurance policies, including Admiral’s primary policy, had tendered their policy limits, based upon the “other insurance” clauses in the respective policies.
The Second Circuit reversed on appeal and held in favor of Admiral. At the outset, the court noted that there was no dispute that Century’s policy was a “true excess policy” such that, by its terms, Century is not liable to tender payment until all other applicable policies are exhausted. Notwithstanding this, the court credited Admiral’s argument that priority should be based upon the indemnity agreement in the underlying trade contract between Rukh and the LIRR, under which Rukh agreed to indemnify the LIRR for liability arising out of the bridge painting project. The court recognized that the issue had not been addressed by the New York Court of Appeals, so it looked to mixed decisions of New York’s intermediate appellate courts. Ultimately, the Second Circuit sided with the decisions holding that the indemnification provision of the trade contract controlled. The court predicted that the New York Court of Appeals “would not require a separate action to enforce the parties’ indemnity agreement.” Thus, the court held, “the parties’ rights and obligations based upon both the terms of the Century Surety policy and the underlying indemnity agreement should be determined in one action.” Accordingly, the court directed Century to pay into the underlying settlement and exhaust its policy limits before Admiral, notwithstanding the Century policy’s “other insurance” provision that qualified the Century policy as a “true excess policy.”
In Mutual Assurance Society of Virginia v. Federal Insurance Co., the U.S. Court of Appeals for the Fourth Circuit predicted that Virginia courts would adopt the “true excess is always excess” rule in a dispute over priority of coverage for a fatal boating accident between a primary homeowners insurer and a group personal excess liability insurer. Rand Hooper was operating his parents’ boat when he was involved in an accident that resulted in the death of his passenger. The deceased’s estate sued Rand and his parents, who sought coverage under (1) Rand’s homeowner’s policy issued by Mutual Assurance Society of Virginia (Society), and (2) Rand’s mother’s employer’s “group personal excess liability policy” issued by Federal Insurance Company (Federal), which covered Rand as a permissive user of his mother’s boat. The lawsuit was settled with Society and another insurer paying their policy limits of $500,000 each, and Federal contributing $3 million of its $5 million limits for the balance of the settlement. Society reserved its right to pursue contribution from other insurers, and later sued Federal for reimbursement alleging that Society had paid more than its pro rata share of the settlement. Society argued that its policy and Federal’s policy both provided excess insurance coverage for the underlying claim and both contained mutually repugnant “other insurance” clauses that required Society and Federal to share liability on a pro rata basis. The district court disagreed with Society, finding Federal’s policy, as a “true excess policy”, to be excess to the Society policy, which was a primary policy with an excess “other insurance” clause. The Fourth Circuit affirmed, holding that the district court correctly analyzed applicable state law and properly considered the relative premiums and policy limits of the policies to be relevant to its decision.
In doing so, the Fourth Circuit endorsed the district court’s analysis of case law distinguishing “other insurance” disputes between two excess insurers from disputes between a true excess policy and a primary policy containing an excess “other insurance” provision. Specifically, the court recognized that “other insurance” provisions are often negated in disputes between two excess insurers, even where one policy’s “other insurance” clause is “more direct” or “specifically” declares itself excess over other policies, but courts recognize the existence of true excess policies that are intended to apply above any type of primary coverage, even primary policies containing excess “other insurance” provisions or escape clauses.
In Hallmark Specialty Insurance Co. v. Continental Insurance Co., the U.S. Court of Appeals for the Ninth Circuit considered whether a provision of the California Insurance Code concerning priority of insurance applied to excess policies. The statute at issue, California Insurance Code § 11580.9(h), provides:
[W]hen two or more policies affording valid and collectible automobile liability insurance apply to a power unit [i.e., tractor] and an attached trailer or trailers in an occurrence out of which a liability loss shall arise, and one policy affords coverage to a named insured in the business of a trucker, defined as any person or organization engaged in the business of transporting property by auto for hire, then the following shall be conclusively presumed: If at the time of loss, the power unit is being operated by any person in the business of a trucker, the insurance afforded by the policy to the person engaged in the business of a trucker shall be primary for both power unit and trailer or trailers, and the insurance afforded by the other policy shall be excess.
In May 2018, an accident occurred involving a tractor and trailer. The tractor was covered under primary and excess insurance policies issued by Northland Insurance Company (Northland) and Hallmark Specialty Insurance Company (Hallmark), respectively, and the trailer was covered under a primary policy issued by Continental Insurance Company and National Fire Insurance Company of Hartford (collectively, National). Northland and Hallmark paid their policy limits towards a settlement of the claim, and Hallmark sought contribution from National. National declined Hallmark’s demand for contribution, and Hallmark sued. The district court dismissed Hallmark’s suit, finding that Section 11580.9(h) applied to make National’s primary policy excess to both Northland’s primary and Hallmark’s excess policy.
On appeal, Hallmark argued that Section 11580.9(h) should be read to apply only to disputes between primary insurers, not to a dispute between a primary insurer and an excess insurer such as Hallmark. The court rejected this argument, explaining that nothing in the statute limited its application to primary insurers only, and the legislative intent of the statute was to broadly ameliorate potential conflicts and litigation between insurers. Hallmark also argued that the statute’s reference to “valid and collectible” insurance must refer to primary insurance only, because excess insurance is not collectible at the time of the accident. The court acknowledged that an excess policy only becomes collectible after the underlying coverage is exhausted, but held that the statute applies because the National policy was automatically rendered excess to the Northland policy by operation of the statute at the time of the accident, so both the National and Hallmark policies were on the same footing and became collectible at the same time once the Northland policy exhausted.
Other Excess Insurance Decisions of Interest
In North American Elite Insurance Co. v. Menard, Inc., the U.S. Court of Appeals for the Seventh Circuit held that an insured was not liable for bad faith failing to settle a case within its self-insured retention, thereby exposing its excess carrier’s policy.
Menards, Inc., a retailer, maintained an insurance program consisting of a $2 million self-insured retention, a $1 million primary policy with Greenwich Insurance Company (Greenwich), and a $25 million umbrella policy with North American Elite Insurance Company (North American). In 2016, Menard was sued by a customer who had been struck by a forklift driven by a Menard employee. On the first day of trial, the claimant demanded $1,985,000 to settle the case, which was within Menard’s self-insured retention. North American urged Menard to accept the demand but Menard declined. The claimant was ultimately awarded $6 million, as reduced by a pre-verdict bracketing agreement between Menard and the claimant. North American paid its $3 million share of the award, excess of Menard’s self-insured retention and Greenwich’s primary policy limits, and North American sued Menard alleging that Menard had violated its duties under Illinois law by rejecting the claimant’s settlement demand and proceeding to trial.
The court rejected North American’s argument, finding that Menard’s self-insured retention did not render it an insurer or subject it to an insurer’s obligations to excess insurers such as North American. The court also rejected North American’s argument that Menard’s violated the cooperation condition of North American’s policy by rejecting the claimant’s settlement offer. Further, the court refused to extend to North American a condition in Greenwich’s primary policy that required Menard to attempt to settle claims within its self-insured retention, explaining that North American was not a third-party beneficiary of the Greenwich policy and did not follow form to the Greenwich policy.
In Greer v. Waste Connections of Tennessee, Inc., the U.S. District Court for the Western District of Tennessee addressed automatic disclosure of excess policies under Rule 26(a)(1)(A)(iv) of the Federal Rules of Civil Procedure. The claimant alleged that he was injured in a “catastrophic vehicular collision that left [him] with a brain injury,” and sought at least $450,000 in damages. When making its Rule 26 initial disclosures, the defendant disclosed a single, $7.5 million liability insurance policy and revealed the existence of an excess tower of coverage but declined to produce additional policies on the basis that the primary policy was sufficient to cover the claimant’s claim several times over. The claimant moved to compel production of the excess policies.
The court agreed with the claimant and ordered the defendant to produce all policies in the insurance tower, even though umbrella and excess policies exceeded the claimant’s alleged damages. The court explained that Rule 26 requires disclosure of “any” insurance policy that “may be liable to satisfy all or part of a possible judgment.” The court concluded that Rule 26 is automatic and its disclosures are mandatory, and the defendant could not rely upon relevance objections to avoid producing its excess policies.
Developments in Reinsurance Law
This survey period also saw courts from around the country render decisions that will significantly impact the reinsurance industry. The New York Court of Appeals brought an end to the Bellefonte saga. The Second and Eleventh Circuits both rendered decisions addressing a reinsurer’s duty to follow the fortunes or settlements of its cedent. The Sixth and Eighth Circuits reaffirmed the arbitration panel’s role on questions of timeliness and arbitrability in the context of reinsurance disputes. The D.C. Circuit and a Texas intermediate appellate court grappled with policyholder’s attempts to bring direct actions against reinsurers. And courts from around the country issued opinions addressing reinsurance-related discovery issues.
The Interpretation of Facultative Reinsurance Certificates and the End of the “Bellefonte Rule”
This survey period saw a significant development when the U.S. Court of Appeals for the Second Circuit overturned nearly thirty-years of precedent regarding the interpretation of liability caps in facultative reinsurance certificates under New York law. For decades, reinsurers and courts relied on the Second Circuit’s decisions in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co. and Unigard Security Insurance Co. v. North River Insurance Co., for the proposition that “reinsurance accepted” limits in a facultative certificate capped a reinsurer’s liability for both indemnity and expenses. In Global Reinsurance Corp. of America v. Century Indemnity Co., however, the Second Circuit recently concluded that those cases were wrongly decided and inconsistent with New York law.
Like others before it, the Global v. Century case arose from a dispute between Global (the reinsurer) and Century (the ceding insurer) about whether “reinsurance accepted” limits in facultative reinsurance certificates capped Global’s reinsurance obligations with respect to both losses and defense costs. Initially, the district court ruled for Global that it did, citing the Second Circuit’s precedent in Bellefonte and Unigard. On appeal Century argued that the district court’s decision was contrary to both the plain language of the reinsurance certificates and the intent of the reinsurance agreements, which were written to be “concurrent with” the underlying policies, pursuant to which Century’s obligation to pay defense costs was not subject to the coverage limits. In light of these arguments, the Second Circuit asked the New York Court of Appeals “whether New York Law imposed a rule of construction or strong presumption that a reinsurance certificate’s liability limit caps the reinsurer’s liability with respect to both indemnity losses and defense costs regardless of whether the underlying policy being reinsured is understood to cover defense costs in excess of the policy’s liability limit.” After the New York Court of Appeals answered “no” and reaffirmed that reinsurance agreements are subject to ordinary rules of contract interpretation, the Second Circuit remanded the case to the district court for further consideration. Following a trial, the district court reversed its prior decision, holding that the “reinsurance accepted” amount in the facultative reinsurance certificates did not cap Global’s obligation to pay its proportionate share of Century’s defense costs.
On appeal again, the Second Circuit affirmed the district court’s findings. The Circuit Court found that “[b]ecause the certificates do not specifically provide that the terms of Global’s reinsurance differ from those of the Century policies with respect to the treatment of defense costs,” a “follow-form” clause in the reinsurance certificates “requires that Global’s payments toward Century’s defense costs be made in addition to the certificates’ limits.” In reaching this conclusion, the court specifically rejected Global’s argument that the “follow form” clause was “subordinate” to the reinsurance accepted limits, finding instead that the “follow form” clause made the reinsurers’ liability “subject in all respects to all the terms and conditions of the” underlying policy “except as otherwise specifically provided” in the reinsurance agreement. The court also found that “evidence of custom and usage concerning the central importance of concurrency to the reinsurance market when the certificates were issued,” supported the conclusion that Global’s payment of defense costs should be in addition to the reinsurance accepted limits.
After affirming the district court’s decision, the court then addressed its prior decisions in Bellefonte and Unigard. The court found that the New York Court of Appeals’ answer to its certified question “exposed a fundamental conflict between our holdings in Bellefonte and Unigard”—where the court held that reinsurance accepted limits “necessarily cap[ped] all obligations owed by [the] reinsurer[s], such as defense costs, without regard for the specific language employed therein”—and “‘the standard rules of contract interpretation’ … applicable to facultative reinsurance contracts.” This prompted the court to reexamine its holdings in Bellefonte and Unigard and find that because those decisions “disregard[ed] the precise terminology that the parties used and simply assume[d] … that … clause[s] bearing the generic marker of a ‘limitation on liability’ or ‘reinsurance accepted’ clause [were] intended to be cost-inclusive,” they were “inconsistent” with New York law. Thus, the Court ruled that Bellefonte and Unigard “are ‘no longer good law.’”
Follow the Fortunes/Follow the Settlements
This survey period saw two U.S. Circuit Courts address the follow-the-fortunes/follow-the-settlements doctrines in reinsurance disputes. First, in Public Risk Management of Florida v. Munich Reinsurance America, Inc., the Eleventh Circuit rejected a ceding insurer’s argument that the follow-the-fortunes doctrine required its reinsurer to provide coverage for losses that the court found were unambiguously excluded by both the underlying policy and the reinsuring agreement. The case arose from a property dispute between the City of St. Pete Beach (“the City”) and two of its residents (“the Residents”). In 2006, the Residents brought and won a quiet title action against the City, but the City nevertheless continued to allow the public to access the property. Thereafter, in 2009, the Residents brought suit against the City alleging inverse condemnation and an unlawful seizure of their property.
The City sought both defense and indemnity from Public Risk Management (PRM), who in turn notified its reinsurers, including Munich Reinsurance America, Inc. (Munich). Munich denied coverage, asserting that the claims arose from wrongful acts that predated the 2008 effective date of its reinsurance agreement with PRM (the “Reinsurance Agreement”). Thereafter, following a jury trial and a verdict for the Residents, PRM decided to settle the residents claims for $750,000. When Munich again refused to reimburse PRM under the Reinsurance Agreement, PRM filed suit for breach of contract. A magistrate judge issued a report and recommendation in Munich’s favor, finding that because the occurrence pre-dated 2008, it was not covered under either the underlying PRM policy or the Reinsurance Agreement. The district court adopted the magistrate’s findings and PRM appealed to the U.S. Court of Appeals for the Eleventh Circuit.
PRM presented two arguments on appeal. In the first, PRM argued that the Reinsurance Agreement contained an express follow-the-fortunes clause that precluded Munich from second-guessing its good faith decision to settle the claim. Alternatively, PRM argued that even if the Reinsurance Agreement did not have an express follow-the-fortunes clause, the district court should have inferred one. The Eleventh Circuit rejected both arguments as inconsistent with the plain language of the Reinsurance Agreement.
The court dismissed PRM’s first argument, noting that the provisions PRM cited as the “express” follow-the-fortunes clause actually “make clear that Munich agrees to indemnify PRM only for occurrences which occur during the 2008/2009 [coverage period].” The court also pointed to the Reinsurance Agreement’s requirement that PRM “submit to Munich not only proof that PRM has paid its insured (i.e., the City), but also proof that Munich’s Reinsurance Agreement provides coverage for such payment.” In light of this, the court found that “[s]quarely contrary to providing that Munich will be bound by PRM’s good faith coverage decisions—the core principle of the follow-the-fortunes doctrine—these provisions require that PRM must submit proof to Munich not only that PRM has paid amounts to its insured (i.e., the City), but also proof that Munich’s Reinsurance Agreement provides coverage for such payments.”
Next, the court rejected PRM’s argument that the court “should infer” that the follow-the-fortunes doctrine “applies to any reinsurance contract under Florida law.” In doing so, the court stressed that “[w]here a reinsurance agreement contains terms that are plainly and unambiguously inconsistent with the follow-the-fortunes doctrine (as the Reinsurance Agreement does here), we are confident that the Supreme Court of Florida would not infer application of the doctrine.” The court, however, declined to address whether the follow-the-fortunes doctrine should be inferred in reinsurance contracts that contain “neither an express follow-the-fortunes clause nor language that is plainly inconsistent with the doctrine,” leaving that question undecided.
The Second Circuit also grappled with the follow-the-settlements doctrine as applied to a ceding insurer’s settlement allocation in Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co. As discussed in Section I(A), the case centered on a dispute between OneBeacon (the reinsurer) and Fireman’s Fund (the ceding insurer) regarding portions of a settlement that Fireman’s Fund allocated to an upper-level excess policy reinsured by OneBeacon. OneBeacon argued that it had no reinsurance coverage obligations because Fireman’s Fund’s allocation to the reinsured policy violated both that policy’s exhaustion requirement and the terms of the reinsurance agreement itself.
As noted above, the court rejected OneBeacon’s argument regarding the reinsured policy’s exhaustion requirements, finding that although the parties could have agreed on language requiring the actual payment of claims to exhaust the underlying policies, the actual language in the Fireman’s Fund policy did not preclude exhaustion through a below limits settlement whereby the insured agreed to fully release all claims for coverage on the policy. The court employed a similar reasoning to reject OneBeacon’s argument that the reinsurance agreement required the actual payment of all underlying limits of coverage because the “reinsurance accepted” provision specified that coverage was “excess of $75 million excess of underlying [$3 million self-insured retention].” The court found that the stated coverage obligations “[did] not define the $75 million figure in terms of payments by insurers” and did not “refer to any type of exhaustion requirement, and as such declined to infer an “unstated condition … that would drastically limit the reinsurer’s coverage obligations.”
In light of these findings, and as it was uncontroverted that the insured faced liability far in excess of the Fireman’s Fund policy’s attachment point (meaning Fireman’s Fund would not be “dropping down” to provide coverage), the court found that Fireman’s Fund’s allocation of the settlement was appropriate, and that OneBeacon was bound by the reinsurance agreement’s follow-the-settlements provision.
Reinsurer Direct Liability and Contractual Privity
This survey period also saw multiple cases addressing the issue of direct actions brought by policyholders against reinsurers. First, in Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, a finance company (“Vantage”) sought to recover roughly $20 million in reinsurance proceeds in partial satisfaction of a $25 million arbitration award it had secured against its direct insurer. The dispute arose when one of Vantage’s clients defaulted on a loan, prompting the finance company to make a claim under its credit risk insurance policy. The direct insurer disputed the claim, and the parties proceeded to arbitration, but the direct insurer failed to provide the reinsurers with notice of the claim. As such, before the direct insurer could seek indemnity for the panel’s award under the various reinsurance agreements, the reinsurers affirmatively disclaimed coverage.
Shortly thereafter, Vantage filed suit against its direct insurer, the reinsurers, and the broker who helped place the reinsurance agreements, asserting claims for breach of contract, breach of implied contract, promissory estoppel, unjust enrichment, and declaratory judgment against the reinsurers, and asserting various claims for negligence against the broker who helped place the insurance. The district court dismissed the breach of contract and declaratory judgment claims against the reinsurers because the finance company and the reinsurers had not entered into a contract. The district court subsequently entered summary judgment in favor of the reinsurers and the broker on the remaining claims, citing a lack of evidentiary support.
On appeal, the U.S. Court of Appeals for the D.C. Circuit affirmed the district court’s rulings on all counts. With respect to the breach of contract and declaratory judgment claims against the reinsurers, the court found that Vantage “failed to plead facts sufficient to show a contractual relationship with the Reinsurers.” The court dismissed Vantage’s argument that disclosure of a reinsurance policy and a description of that policy in the binder given to Vantage established a contractual relationship, agreeing with the district court that “a reinsurer ‘generally does not have a direct contractual relationship with the original insured unless the terms of the reinsurance agreement create such a relationship.’” Here, the reinsurance agreements specifically stated that they were “solely between [direct insurer] and the Reinsurer[s]” and further stated that they did not “create any obligations or establish any rights against the Reinsurer[s] in favor of any person or entity not a party hereto.” In light of this, and as Vantage’s complaint contained no allegations that the reinsurers dealt directly with Vantage or otherwise treated Vantage as a direct insured, the court found that Vantage’s claims for breach of contract and declaratory judgment “are not ‘plausible on [their] face.’”
The court also affirmed the district court’s grant of summary judgment on Vantage’s claims for breach of implied contract, promissory estoppel, and unjust enrichment against the reinsurers, citing a complete lack of evidentiary support. In doing so the court noted that: (1) the implied contract claim failed because there was no evidence that Vantage paid the reinsurers any consideration for “obligating themselves to cover Vantage directly and on top of the risk that [the Reinsurers] assumed on behalf of [the direct insurer]”; and (2) the promissory estoppel and unjust enrichment claims failed because (as pled) they relied on the existence of an agency relationship between the reinsurers and either the direct insurer or the reinsurance broker, and Vantage had produced no evidence of an agency relationship.
Finally, the court affirmed the dismissal of Vantage’s various negligence claims against the broker, including the claim that the broker negligently “misrepresented the terms of the Reinsurance Agreements” by indicating in the insurance binder that “reinsurance was ceded on the ‘same terms, conditions and settlements’ as the original insurance policy.” Vantage argued that it had relied on this statement as a commitment that the reinsurers would pay claims covered by its policy with the direct insurer. However, the court found there was no evidence these representations were false when made or that the broker failed to exercise reasonable care when communicating that information. As such, the court found that Vantage failed to plead a plausible claim for negligent misrepresentation.
By contrast, in Travelers Indemnity Co. v. Alto Independent School District, a Texas intermediate appellate court allowed a policyholder’s direct action against a reinsurer to proceed, affirming the trial court’s denial of the reinsurer’s motion to dismiss. The dispute arose when the policyholder—Alto Independent School District (Alto)—filed suit against both (a) its direct insurer (a liability risk retention group), and (b) Travelers, who reinsured the direct insurer under a facultative reinsurance certificate and allegedly adjusted the property claim, seeking to recover on an unpaid property claim. Alto asserted claims against Travelers for common law fraud, conspiracy to commit fraud, misrepresentation, and unfair trade practices under Texas law.
Travelers moved to dismiss the suit or stay the matter in favor of arbitration, arguing that—although Alto was not a signatory to the reinsurance agreement—its claims “necessarily arise out of or relate to the Reinsurance Certificate” and as such were subject to the reinsurance agreement’s arbitration clause. Alternatively, Travelers argued, Alto must be compelled to arbitrate its claims based on the doctrine of equitable estoppel, because its suit seeks direct benefits from the Reinsurance Contract. The trial court disagreed with both arguments, and denied Travelers’ motion.
On appeal, the Texas appellate court affirmed the trial court’s decision, finding that because Alto’s claims did not arise from (or seek benefits under) the reinsurance contract, they were not subject to arbitration. In doing so, the court found that Alto’s suit did not assert a claim for benefits under the reinsurance agreement, but rather “premises Travelers’ liability on tort, DTPA, and insurance code duties that are general, noncontract obligations.” The court also noted that because Alto “has no rights under the Reinsurance Contract” it “would be unable to maintain a contract claim against Travelers under the Reinsurance Contract even if it were inclined to do so.” Accordingly, the court found that “any liability of Travelers is necessarily extracontractual,” and that, as such, Alto was not bound by the arbitration clause in the reinsurance agreement.
Arbitrability in Reinsurance Disputes
This survey period also saw two U.S. Circuit Courts reaffirm an arbitration panel’s role in ruling on questions of timeliness and arbitrability. First, in Alliance Health & Life Insurance Co. v. American National Insurance Co., the U.S. Court of Appeals for the Sixth Circuit held the timeliness of an insurer’s demand for arbitration against a reinsurer was a question for the arbitrator, not the court. The dispute arose from a Medical Excess Reinsurance Agreement (Agreement) between Alliance and American National, effective January 1, 2016. Although the Agreement included an arbitration provision, the Agreement required that “[n]o arbitration may be commenced more than 3 years after the Effective Date of this Agreement.”
Alliance submitted a claim for nearly $1 million in reinsurance from American National on December 20, 2018, which American National ultimately denied on September 23, 2019. Thereafter, Alliance sued American National in federal court alleging breach of contract. American National moved to dismiss, arguing that whether the three-year limitation applied to the dispute was a question reserved for an arbitrator, not the court. The district court agreed with American National and dismissed the suit without prejudice.
On appeal, the Sixth Circuit affirmed the district court’s holding. The court distinguished substantive questions of arbitrability from procedural questions of arbitrability, reserving the latter for an arbitrator to decide. Although Alliance raised substantive and procedural questions on appeal, the Sixth Circuit noted that Alliance’s only argument before the district court was that the dispute fell outside of the three-year time limitation. Citing Supreme Court precedent, the Sixth Circuit characterized the application of a contractual time limit as a “quintessential question of procedural arbitrability” reserved for an arbitrator.
Similarly, in SUNZ Insurance Co. v. Butler American Holdings, Inc., the U.S. Court of Appeals for the Eighth Circuit held challenges to the validity of a contract, as opposed to an agreement to arbitrate, are arbitrable. The underlying dispute stemmed from a Program Manager Agreement between SUNZ and Benchmark, which required Benchmark to issue workers’ compensation policies to be managed by SUNZ. Pursuant to that agreement, SUNZ and Benchmark entered into additional agreements pertaining to the collection of deductible collateral and reinsurance of the policies. Importantly, SUNZ also entered into related “Program Agreements,” agreeing to issue policies to Payday Inc. and Century Employer Organization. Each Program Agreement contained arbitration clauses applicable to “any controversy or claim arising out of . . . [the Program Agreement] or the . . . alleged breach hereof.” The Program Agreements also stated that the insurance policies would prevail if there was a conflict between the Program Agreements and the policies.
SUNZ later terminated its agreements with Benchmark, serving Benchmark with an arbitration demand seeking the release of excess collateral held by Benchmark. In turn, Benchmark filed an Interpleader action, naming SUNZ, Payday, and Century as defendants. Payday and Century filed crossclaims against SUNZ, alleging breach of the insurance policies. In addition to other motions, SUNZ moved to compel arbitration against Payday and Century. The district court denied the motion, reasoning the crossclaims did not fall within the arbitration clauses’ scope.
On appeal, the Eighth Circuit reversed the district court’s denial of the motion to compel arbitration, citing the Program Agreements’ broad arbitration clauses. Payday and Century argued the motion to compel arbitration was rightfully denied because the policies superseded the Program Agreements, rending the arbitration clauses void. The Eighth Circuit reasoned this argument was not a challenge to the arbitration clause itself but rather a challenge to the contract’s validity. Accordingly, the court held that “unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.”
Discoverability of Reinsurance Information in Suits Between Policyholders and Direct Insurers.
Lastly, this survey period saw several cases addressing discovery disputes between policyholders and direct insurers regarding information about reinsurance. First, in Caterpillar, Inc. v. Volt Information Sciences, Inc., the Appellate Court of Illinois reversed a trial court’s order requiring an excess insurer to produce reinsurance materials without first conducting an in camera review. In the underlying coverage action, Caterpillar sued several carrier-defendants, including Travelers, for liability and defense costs arising out of a manufacturing error dispute. During discovery, Caterpillar requested documents from Travelers including, among others, documents related to its reinsurance of the subject policy. Travelers objected to the request, producing only heavily redacted versions of the documents. The trial court ordered Travelers to produce unredacted versions of the documents and held Travelers in contempt when it failed to comply with the order.
On appeal, Travelers argued the court erred when it ordered Travelers to produce the documents without redactions without first conducting an in camera review, arguing the reinsurance materials were irrelevant and privileged. Caterpillar argued the disputed documents, including the reinsurance materials, were prepared in the ordinary course of business and thereby were not privileged. The Appellate Court of Illinois reversed the trial court’s decision, though the court declined to decide whether the reinsurance materials were relevant or privileged. Instead, the court reasoned it was improper for the trial court to order the unredacted production of the reinsurance materials without first conducting an in camera review.
The U.S. District Court for the Southern District of New York addressed a similar issue in Computer Science Corp. v. Endurance Risk Solutions, ultimately ordering an insurer to produce all communications with its reinsurers in a coverage action. The discovery dispute arose out of Endurance’s denial of a claim under its excess policy issued to Computer Science. In addition to underwriting and claims handling materials, Computer Science sought reinsurance agreements relating to Endurance’s excess policy.
Endurance objected to the request, reasoning reinsurance agreements are irrelevant to the issue of whether the insurer could satisfy a judgment. The court rejected Endurance’s argument, holding that communications with a reinsurer pertaining to the disputed claim are relevant. Accordingly, the court ordered Endurance to produce all documents pertaining to Endurance’s communications with Reinsurers regarding the claim at issue.
