Reinsurance Avoidance

Southern District of New York Rejects Reinsurer’s Claim that Exhaustion Provision Was Not Met; Concludes Indemnification Was Required Under Follow-the-Settlement Clause

December 14, 2020 by Brendan Gooley

The United States District Court for the Southern District of New York rejected a reinsurer’s denial of a claim. The court disagreed with the reinsurer’s position than exhaustion language had not been satisfied, and found the exhaustion language ambiguous and concluded that payment was required under a “follow-the-settlement” clause in the reinsurance certificate.

Fireman’s Fund Insurance Company issued three excess liability policies to Asarco. The third policy (“Policy 3”) provided “coverage of $20 million for losses in excess of $75 million in excess of a $3 million self-insured retention for the period March 15, 1983 to March 15, 1984.”

General Accident Insurance Company reinsured Policy 3 under a facultative reinsurance contract in which it assumed “15% . . . of the risk assumed in Policy 3.” OneBeacon Insurance Company subsequently became the successor-in-interest to General Accident.

Asarco filed an action against Fireman’s seeking coverage for asbestos exposure. Fireman’s estimated its exposure at $50.3 million. It settled with Asarco for $35 million and allocated a portion of that settlement to Policy 3 in accordance with its exposure analysis.

Fireman’s then billed OneBeacon pursuant to the reinsurance agreement. OneBeacon denied Fireman’s claim, asserting that the policies underlying Policy 3 had not been exhausted.

The court granted summary judgment to Fireman’s. In short, the court explained that the reinsurance certificate contained a “follow-the-settlements” provision that required OneBeacon to make payments in accordance with Fireman’s good-faith settlement, which was reasonable. That clause was not trumped by any exhaustion clause in Fireman’s policies because the term exhaustion was ambiguous within the meaning of Fireman’s policies.

Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., No. 14-civ-4718 (PGG) (Oct. 19, 2020).

Court Denies Reinsurers’ Attempts to Avoid Suit

May 17, 2019 by Brendan Gooley

The U.S. District Court for the District of Columbia recently denied attempts by reinsurers to avoid a suit by moving to have the claims against them dismissed or, in the alternative, seeking to compel arbitration or stay the case pending a related arbitration.

Vantage Commodities Financial Services I, LLC sued various reinsurers. The court dismissed Vantage’s breach of contract claim but allowed Vantage to file an amended complaint in which it alleged breach of implied contract, promissory estoppel, and unjust enrichment claims. The reinsurers moved to dismiss those claims. They argued that express agreements foreclosed the claim that there was a breach of an implied contract. The court disagreed. It noted that Vantage was not a party to any agreement with the reinsurers. Thus, the court also rejected the reinsurers’ claim that Vantage’s claim was untimely under an agreement.

In the alternative, the reinsurers sought to compel arbitration. Because Vantage and the reinsurers were not parties to an agreement with Vantage, however, the court concluded that the parties had not agreed to arbitrate disputes under arbitration clauses in a related agreement.

The court then rejected the reinsurers’ request that Vantage revise its amended complaint, reasoning that the complaint was not unduly vague or ambiguous. Finally, the court denied the reinsurers’ request for a stay pending ongoing arbitration. The court recognized that there were “overlapping factual issues common to both the arbitration and [the] litigation,” but found that overlap was insufficient to justify a stay and that it would not be in anyone’s interest to allow the “case to languish” during a pending arbitration of undetermined length.

Vantage Commodities Fin. Servs. I, LLC v. Assured Risk Transfer PCC, LLC, No. 1:17-cv-01451 (TNM) (D.D.C. Apr. 26, 2019).

Federal Court in Puerto Rico Voids Marine Insurance Policy Based Upon Misrepresentation in Insurance Application

September 5, 2018 by John Pitblado

QBE Seguros brought a successful action declaring a marine insurance policy was void ab initio under the doctrine of uberrimae fidei and the breach of the warranty of truthfulness in the application for insurance.

In Morales’ application for insurance, he did not include the fact that he had previously grounded a 40’ yacht and listed only two of the seven vessels that he had owned and operated when asked. Following an endorsement, Morales held hull insurance for a vessel named Making Waves, which sustained damage as a result of a fire. Thereafter, QBE rescinded the policy.

The Court first looked at uberrimae fidei, or the duty of utmost good faith, which requires the insurer to show that the insured misrepresented a material fact. Having determined Morales misrepresented his prior boating history and prior loss history on his application, the Court looked at whether such misrepresentation was material. “A fact is material if it can possibly influence the mind of a prudent and intelligent insurer in determining whether it will accept the risk.” QBE testified that prior loss history is an important factor to take into consideration when evaluating the risk posed by issuing a particular policy. The Court determined this information was material: “it is entirely logical that an insured’s loss history would affect their premiums and whether an insurance company would want to accept the risk of issuing them a policy.”

The Court then looked at whether the contract between the parties included a warranty of truthfulness, and if so, the insured’s misrepresentation of fact in that contract will also excuse the insurer from the policy contract. The insurance application stated the information provided therein is warranted by the applicant “to be true and correct in all respects.” The Court found the “warranty of truthfulness was material to the risk assumed by QBE in issuing the policy.” The Court rejected Morales’ affirmative defenses, finding that “Morales breached the warranty of truthfulness in the QBE Application and policy by failing to disclose his prior loss history and his prior boating experiences. His breach gives QBE the right to void the policy.”

The Court denied Morales’ counterclaims for breach of contract and consequential damages due to QBE’s bad-faith adjustment.

QBE Seguros v. Morales-Vázquez, No. 15-2091 (USDC D.P.R. Aug 7, 2018)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

Court Enforces Forum Selection And Choice Of Law Clauses In Worker’s Compensation Reinsurance Participation Agreement

August 20, 2018 by Michael Wolgin

Plaintiff AGL Industries, Inc. (AGL), a steel fabrication and erection business, enrolled in a workers’ compensation insurance policy with Defendant Continental Indemnity Company and a reinsurance participation agreement (RPA) with Defendant Applied Underwriters Captive Risk Assurance Company, Inc. After Continental canceled the workers’ compensation insurance policy, AGL sued in New York for breach of contract and related claims and obtained emergency injunctive relief. Defendants then removed the case to federal court, which then granted a motion by Defendants to transfer venue to Nebraska based on the RPA’s forum selection and choice of law clauses. The federal court rejected AGL’s argument that the RPA was void ab initio because it was “an illegal workers’ compensation policy” in violation of New York insurance law. The court found that AGL did not assert that the forum selection clause was the result of fraud or misrepresentation, and therefore, at worst, the clause was severable from the RPA. Moreover, the Court found unpersuasive AGL’s sole argument against enforcing the forum selection clause that transferring the action to Nebraska would violate New York’s public policy in favor of “granting insureds access to the courts of the State of New York for all disputes regarding policies written in and for residents of the State [of New York].” AGL Industries Inc. v. Continental Indemnity Co., Case No. 17-4179 (USDC E.D.N.Y. July 18, 2018).

This post written by Gail Jankowski.

See our disclaimer.

Ninth Circuit Upholds Denial Of Judgment Creditor’s Request For Rescission Of Quota-Share Reinsurance Agreement

May 30, 2018 by Michael Wolgin

Defendant National Farm Financial Corp. agreed to sell Business Alliance Insurance Co. (BAIC) to PSM Holding Corp. After National Farm walked away from the deal, PSM sued National Farm, BAIC, and BAIC’s president, Larry Chao, in the District Court for the Central District of California alleging breach of contract. A jury found in favor of PSM and awarded it $40 million.

After taking possession of BAIC, PSM and BAIC entered into an intercompany quota share reinsurance agreement (QSA). The district court’s ruling was then reversed on appeal and remanded, and upon remand, the court concluded that the defendants were entitled to specific restitution of the BAIC shares and an accounting of the profits earned while PSM held BAIC, diminished by expenses necessarily incurred in the protection of the property and the payment of taxes and liens. Thereafter, the defendants filed a motion for an award of PSM’s profits totaling $14 million. PSM opposed the motion, arguing that it actually suffered a $1.5 million loss as a result of its temporary possession and control of BAIC and sought to rescind the QSA. The court decided that defendants would receive the return of BAIC’s shares, but that PSM would receive restitution of $1.1 million. The court also held that PSM could not rescind the QSA.

The parties cross-appealed to the Ninth Circuit, which concluded that the district court erred in allowing PSM – the judgment creditor – to recover in restitution. Regarding rescission of the QSA, however, the Ninth Circuit affirmed, agreeing with the district court that the QSA could not be rescinded since it was “an improvement” to BAIC rather than a necessary cost of protecting BAIC. PSM Holding Corp. v. Nat’l Farm Fin. Corp., Case Nos. 15-55026, 15-55941 (9th Cir. Mar. 7, 2018).

This post written by Gail Jankowski.

See our disclaimer.