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Reinsurance Claims

Illinois Federal Court Denies Motion to Dismiss Complaint Alleging Breach of Reinsurance Agreement Between Parties

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In PMC Casualty Corp. v. Virginia Surety Co., the U.S. District Court for the Northern District of Illinois, Eastern Division, addressed a motion to dismiss a complaint filed by a party to a reinsurance agreement alleging that payments due to the reinsurer were being improperly withheld.

Defendant Virginia Surety Co. issued contractual liability insurance policies (CLIPs) to nonparty Protect My Car, which sold vehicle service contracts, or extended warranties, to owners of motor vehicles. The CLIPs issued by Virginia Surety were intended to insure Protect My Car’s obligations to vehicle owners under the service contracts. After it issued the CLIPs, Virginia Surety obtained insurance from plaintiff PMC Casualty Corp. to protect it against the risks it assumed under the CLIPs. Virginia Surety and PMC Casualty entered into a reinsurance agreement, which provided that “Virginia Surety ‘ceded,’ and PMC reinsured, 100 percent of the risk of any payments that might have to be made under the vehicle service contracts covered by the CLIPs.” PMC Casualty was required to maintain a trust account to secure its obligations to Virginia Surety, and the reinsurance agreement permitted withdrawal from the trust account for certain specified purposes. The parties then amended the reinsurance agreement and transferred the funds held in the trust account to a “funds withheld account” to be held by Virginia Surety, subject to the same withdrawal restrictions. Relying on a report issued by Virginia Surety, PMC Casualty then submitted a request for payment from the funds withheld account of more than $18 million, which PMC Casualty alleged was due. Virginia Surety declined the payment, alleging that the funds in the account should be used to cover its potential liabilities in a separate state court lawsuit involving another company.

PMC Casualty disputed that Virginia Surety was entitled to withhold the payment and filed a complaint for breach of contract. Virginia Surety moved to dismiss the complaint, arguing that the amounts it may be liable for in the state court action are, at least in part, the same sums that PMC Casualty is seeking, which makes them subject to the reinsurance agreement. PMC Casualty opposed the motion, arguing that the reinsurance agreement does not give Virginia Surety the sole discretion to withhold payment. The court found that the term “amount(s) relevant to the Agreement” is “arguably facially ambiguous, and it is not defined in the reinsurance agreement,” and noted that the interpretation of the agreement “may entail consideration of extrinsic evidence and thus may involve questions of fact.” The court concluded that given the ambiguities and the lack of merit of Virginia Surety’s other arguments, the complaint is not subject to dismissal on a motion to dismiss for failure to state a claim.

PMC Casualty Corp. v. Virginia Surety Co., No. 1:24-cv-07795 (N.D. Ill. Dec. 30, 2024).

Alabama Federal Court Holds That Tort of Bad Faith Does Not Extend to Reinsurance Contracts

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In Alabama Municipal Insurance Corp. v. Munich Reinsurance America Inc., the U.S. District Court for the Middle District of Alabama addressed whether, under Alabama law, “reinsurance falls within the limited category of insurance agreements to which the tort of bad faith applies.” The case involved claims brought by plaintiff Alabama Municipal Insurance Corp. (AMIC), a nonprofit joint insurance company owned by several municipalities, against its reinsurer Munich Reinsurance America Inc. AMIC obtained contracts for reinsurance from Munich under which Munich covered and would be responsible for paying a portion of claims received by AMIC that exceeded a base amount noted in the reinsurance contracts. AMIC alleged that Munich wrongfully declined reinsurance coverage for the full amount due under five separate insurance claims submitted to AMIC, and Munich underpaid the claims by approximately $1.9 million.

AMIC filed a lawsuit against Munich alleging breach of the reinsurance contracts for the five claims and for bad faith for refusing to pay on three of the claims. Munich filed a motion to dismiss the three counts of bad faith under Federal Rule of Civil Procedure 12(b)(6), arguing that “Alabama does not recognize the tort of bad faith in the reinsurance context.” The parties agreed the dispute was governed by Alabama state law. In addressing the motion to dismiss, the court observed that the Alabama Supreme Court had not addressed whether a claim for bad faith may be brought in connection with a reinsurance contract. The court then noted that “[w]here no state court has decided the issue a federal court must make an educated guess as to how that state’s supreme court would rule.” Applying this principle after a thorough review of decisions addressing the tort of bad faith, the court concluded that “[g]iven the Alabama Supreme Court’s repeated efforts to limit the application of the tort [of bad faith], as well as its emphasis on the primary purpose of the tort as a means to protect consumers, this court concludes that the Alabama Supreme Court would not extend the tort of bad faith to the reinsurance context.” The court then granted Munich’s motion to dismiss the bad faith claims and denied AMIC’s motion to amend its complaint to add additional claims of bad faith.

Alabama Municipal Insurance Corp v. Munich Reinsurance America Inc., No. 2:20-cv-00300 (M.D. Ala. July 22, 2024).

 

District Court Grants Motions to Dismiss Claims Brought by Reinsurer

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The U.S. District Court for the Northern District of Texas recently dismissed certain claims brought by a reinsurer related to its efforts to audit an insurer’s broker.

Antares Reinsurance Co. reinsured United Specialty Insurance Co. United Specialty contracted with National Transportation Associates (NTA) to sell United Specialty policies on commission. Antares sought to audit NTA because it suspected it of fraud. A disagreement concerning the terms of the audit ensued, and Antares filed suit against several defendants seeking specific performance of a contractual provision allowing Antares to inspect NTA’s books, asserting various claims, including breach of contract and fraud/fraudulent misrepresentation, and requesting declaratory relief articulating Antares’ rights regarding inspecting NTA’s books.

The district court dismissed Antares’ claims. It found the specific performance claim moot because the defendants “permitted inspection of the relevant books and records” and that “additional” demands for inspection that the defendants had refused were “non-contractual.” The court held that the fraud claims were barred by the economic loss rule, which provides that “malfeasance doesn’t give rise to a fraud claim unless it resulted in damages beyond those recoverable for the contractual breach itself.” The fraud claims, the court held, “resulted in harms indistinguishable from breach of the underlying contract.” Finally, the court held that the request for declaratory relief was duplicative of the breach of contract claims. The defendants did not move to dismiss the breach of contract claim, however, and that claim therefore survived.

Antares Reinsurance Co. v. National Transportation Associates, Inc., No. 4:23-cv-00928 (N.D. Tex. Mar. 20, 2024).

Reinsurer Permitted to Intervene in Affiliate’s Lawsuit Related to Breach of MGA Agreement

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Texas Insurance Co. sued Talisman Specialty Underwriters Inc. for breaching the parties’ managing general agent (MGA) agreement by authorizing the issuance of hundreds of insurance policies by Texas Insurance in sectors (like marine and energy) where Talisman Specialty did not have the authority to do so. Texas Insurance further alleged that Talisman Specialty had withheld $10 million in premiums owed to Texas Insurance and that it had failed to segregate them in a fiduciary account for Texas Insurance’s benefit as required by the MGA agreement.

Talisman Insurance Co., an affiliate of Talisman Specialty, filed a motion to intervene. Talisman Insurance alleged that it had entered into a quota share reinsurance agreement with Texas Insurance, pursuant to which Talisman Insurance agreed to reinsure the insurance sold by Talisman Specialty. In turn, Texas Insurance agreed to pay Talisman Insurance 94% of the insurance premiums it received, pursuant to the reinsurance agreement. Talisman Insurance argued additionally that Texas Insurance agreed that Talisman Specialty would remit these payments directly to Talisman Insurance, bypassing Texas Insurance. Talisman Insurance alleged that Texas Insurance breached the reinsurance agreement by initiating the lawsuit and by claiming that Talisman Specialty must first remit the premiums to Texas Insurance, thereby interfering with Talisman Insurance’s right to payment.

The district court found that Talisman Insurance was entitled to intervene as of right because it timely filed its motion early in the case and because it had a direct and substantial interest in the insurance premiums which interest would not be adequately represented by the existing parties and which could be impaired if it were not permitted to intervene. Talisman Insurance timely sought to intervene as the motion, although filed approximately two months after Talisman Insurance learned of the suit, came before discovery had opened in the matter, and further, Talisman Insurance did not seek to reopen any prior proceedings in the case.

The court found that Talisman Insurance had a direct and substantial property interest in the premiums and the method of payment, as its alleged contractual right to receive its share of the premiums directly from Talisman Specialty allegedly resulted in administrative cost-savings. If Talisman Insurance were not permitted to intervene and instead was required to institute a separate proceeding, its interests in the premiums and method of payment could be impaired by rulings in the instant lawsuit. Finally, the court found that Talisman Insurance’s interests were not adequately represented by its affiliate, Talisman Specialty, even though the two shared the same counsel, as Talisman Specialty was not a party to the reinsurance agreement and the two entities sought to enforce different contractual rights derived from their individual contracts with Texas Insurance.

As such, the court granted the motion to intervene, finding Talisman Insurance satisfied all of the requirements necessary to establish its entitlement to intervention.

Texas Insurance Co. v. Talisman Specialty Underwriters, Inc., No. 2:23-cv-03412 (E.D. La. Dec. 1, 2023).

Munich Re Prevails in Alabama Reinsurance Dispute

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A federal court recently agreed with Munich Re that it was not obligated to reimburse an insurer for losses and fees the insurer incurred in litigation with its professional liability carrier regarding a bad faith claim stemming from a personal injury suit subject to the reinsurance treaty.

Alabama Municipal Insurance Corp. (AMIC) issued a commercial automobile insurance policy to the town of Woodland, Alabama. A Woodland employee driving a Woodland vehicle was subsequently involved in an accident in which two passengers were seriously injured. The passengers sued Woodland. AMIC defended Woodland against those claims. The passengers obtained jury awards that exceeded AMIC’s applicable policy limits.

The passengers then sued AMIC claiming AMIC acted in bad faith when it failed to settle within policy limits. AMIC tendered the bad faith claim to Scottsdale Insurance Co., which had issued a professional liability errors and omissions policy to AMIC. Scottsdale and AMIC settled the bad faith suit, but Scottsdale then filed a declaratory judgment action seeking a declaration that it had not been obligated to pay any part of the settlement. AMIC counterclaimed for breach of contract and bad faith. Scottsdale prevailed in the declaratory judgment action, AMIC lost on its counterclaims, and Scottsdale obtained its costs and fees.

AMIC requested partial reimbursement for all of this litigation from its reinsurer, Munich Re. Munich Re reimbursed most of the requested sum but concluded that it was not required to reimburse AMIC for AMIC’s costs and fees and Scottsdale’s costs and fees, which AMIC had been ordered to pay, in AMIC’s litigation with Scottsdale (the declaratory judgment action). AMIC sued, claiming that Munich Re was required to reimburse it for those sums as well.

The U.S. District Court for the Middle District of Alabama disagreed with AMIC and held that Munich Re did not owe AMIC any money for AMIC’s losses to Scottsdale.

The district court analyzed the applicable treaties and concluded that Munich Re was “not generally liable for costs that AMIC decided to pay above and beyond its obligations to its insured clients (in this case, Woodland).” AMIC nevertheless maintained that the treaties “obligated AMIC to pursue any other reinsurances or insurances that might inure to Munich [Re]’s benefit, and that this obligation, in turn, further obligated Munich [Re] to reimburse AMIC for th[at] pursuit.” The district court disagreed, noting that the treaty language did not establish any such obligation. Moreover, although “AMIC would have been obligated to reimburse Munich [Re] for any amount of the Woodland settlement that it was able to recover from Scottsdale,” it did not follow (as AMIC claimed) that Munich Re was “obligated to reimburse AMIC for the money it spent while attempting to secure such a recovery.” The treaty did not support that.

This decision was one of several pending disputes between AMIC and Munich Re.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20-cv-00300 (M.D. Ala. Aug. 30, 2023).