Reinsurance Claims

A Pennsylvania appellate court has affirmed the liquidator’s determination that a group excess insurance policy issued by Reliance is a reinsurance policy and thereby entitled to a low level of priority of payment from the now insolvent Reliance estate. At issue was a claim by the Alabama Insurance Guaranty Association for reimbursement from the estate for a claim it had paid to a general contractors fund. The Association argued that the Reliance policy was a direct insurance policy, thereby entitled to a high priority for re-payment, and that the liquidator was obligated to follow an Alabama Supreme Court ruling that the claim arose under a policy of direct insurance.

The Pennsylvania court rejected all of the Association’s claims that the liquidator was bound by the Alabama Supreme Court ruling, including the application of the Full Faith and Credit doctrine and principles of collateral estoppel. The court also rejected any choice of law analysis favoring Alabama over Pennsylvania and concluded that the policy at issue was one of reinsurance under Pennsylvania’s governing law. The material characteristics the court looked to in order to determine that the policy was one of reinsurance included the language of the policy itself referring to a “reinsurance premium” and the obligations of Reliance to “reinsure” the Alabama Reinsurance Trust. The opinion generated a strong and lengthy dissent that criticized the majority for rejecting the Alabama Supreme Court’s holding and for otherwise finding that the policy was a contract of reinsurance and not a group insurance policy that covered catastrophic workers’ compensation claims of the self-insurers that were members of the group. Alabama Insurance Guaranty Association v. Reliance Insurance Co. in Liquidation, No. 6 REL 2012 (Pa. Commw. Ct. Sept. 12, 2014).

This post written by Renee Schimkat.

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A New Jersey appellate court recently addressed that state’s “direct action statute,” concluding that it did not prevent judgment creditors from pursuing a coverage action arising out of an LMX reinsurance spiral. The plaintiffs in the underlying action were former shareholders of certain insurance companies, and they sued the insurers’ managing general agent for professional negligence. The MGA, now defunct, failed to answer. On the eve of the damages hearing, the MGA’s professional liability and excess carriers (Travelers and ERSIC) asserted a variety of coverage defenses, and denied the claim. The plaintiffs obtained a $92 million judgment against the MGA.

After obtaining their judgment, the plaintiffs filed suit in New Jersey against Travelers and ERSIC seeking coverage under the two policies. The trial court dismissed the coverage case due to lack of standing. The trial court based its decision, in part, on New Jersey’s so-called “direct action statute,” N.J.S.A 17:28-2. That statute requires that certain types of policies (those addressing injury to a person and certain loss or damage to property) contain a provision “that the insolvency or bankruptcy of the person insured shall not release the insurance carrier from the payment of damages for injury sustained or loss occasioned during the life of the policy, and stating that in case execution against the insured is returned unsatisfied in an action brought by the insured person because of the insolvency or bankruptcy, then an action may be maintained by the injured person against the [insurer] under the terms of the policy.” The trial court accepted the defendants’ argument that the statute authorizes a direct action against an insurer only for the particular personal injury and property damage risk specified in the statute.

The appellate court disagreed, first noting the general principle that after an injured plaintiff obtains a judgment against an insured tortfeasor that remains unsatisfied due to insolvency, the plaintiff “stands in the shoes” of the insured with respect to the insurance policy and thus acquires standing to pursue an action against the insurer. The court rejected the “direct action statute” argument, holding that just because the statute mandates that certain specifically identified types of policies must contractually provide for the right to a post-judgment action, it does not follow that no such right exists in connection with other types of policies. The appellate court noted that “direct action statute” is a misnomer because the statute does not actually authorize direct actions. Rather, it prohibits insurers from contractually disclaiming, in the specifically enumerated policy types, an injured party’s right to sue the insurer for an unsatisfied judgment. The statute does not provide that derivative or post-judgment actions are available only in regard to those certain types of policies. Accordingly, the plaintiffs had standing to pursue their coverage action. Ferguson v. Travelers Indem. Co., Case No. A-3530-12T3 (N.J. Super. Ct. App. Div. August 4, 2014).

This post written by Catherine Acree.

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