In a summary order, the Second Circuit Court of Appeals has affirmed a federal district court’s interpretation of certain reinsurance contracts in favor of AIOI Nissay Dowa Insurance Company. The central issue in dispute was the scope of AIOI Nissay’s obligations to a group of insurers under contracts that those insurers had purchased from a reinsurance pool, of which AIOI Nissay was a member. The contracts were triggered in the wake of the aviation losses associated with the September 11, 2001 terrorist attacks. The Second Circuit rejected all of the arguments raised by the group of insurers on appeal, recognizing that the primary objective in contract interpretation is to give effect to the intent of the parties. While short on facts, the summary order stated that the “more natural reading” of contractual terms controlled, which was the interpretation advanced by AIOI Nissay, and the court therefore affirmed judgment in favor of AIOI Nissay on its breach of contract claim. AIOI Nissay Dowa Insurance Co. v. Prosight Specialty Management Co., No. 13-2689 (2d Cir. Apr. 22, 2014).
Reinsurance Claims
INSURER MUST FOLLOW THE SETTLEMENTS, NOTWITHSTANDING CLAUSE PURPORTING TO LIMIT SETTLEMENT TO SETTLING INSURERS ONLY
Interest holders in a vessel insured a 50% interest with certain Lloyd’s Syndicates, and a 30% interest with Aigaion Insurance Company. The terms of the Aigaion policy contained a clause reading, “Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex-gratia payments” (the “Follow Clause”). When the Syndicates later settled a claim after the vessel was damaged, a dispute between the insureds and Aigaion arose over whether Aigaion was required to follow the settlement. Aigaion contended that it need not follow the settlement due to the following provision in the settlement agreement between the Syndicates and the insureds (the “Settlement Clause”): “The settlement and release pursuant to the terms of this Agreement is made by each Underwriter for their respective participations in the Policy only…and do not bind any other insurer providing hull and machinery cover in respect of the [vessel].” The insureds disagreed that this provision was enforceable by Aigaion, and argued that Aigaion was obligated to follow the Syndicates’ settlement under the Follow Clause.
The court interpreted the plain meaning of the Aigaion policy and ruled that the Follow Clause did indeed require Aigaion to follow any settlement made by the Syndicates. The court rejected Aigaion’s argument that the clause’s purpose was only to make the Syndicates Aigaion’s agent to negotiate settlement of disputed claims. The court also found that, although it interpreted the Settlement Clause as an attempt to exclude other parties from the settlement between the insureds and the Syndicates, Aigaion was not an intended third-party beneficiary of that agreement, Aigaion was bound under the Follow Clause, and Aigaion therefore could not rely on the Settlement Clause to avoid liability to the insureds. San Evans Maritime Inc., et al. v. Aigaion Insurance Co. SA, [2014] EWHC 163 (U.K. High Court of Justice, Comm. Div. Feb. 4, 2014).
This post written by Michael Wolgin.
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LACK OF PROPER NOTICE TO REINSURER BARS CLAIM FOR PAYMENT UNDER FACULTATIVE REINSURANCE CONTRACTS
A federal district court granted summary judgment in favor of a reinsurer who had been sued by a ceding company for failure to pay under two facultative reinsurance certificates that reinsured two excess liability policies from the 1980s. The certificates required the ceding insurer to promptly notify the reinsurer of “any event or development” that might result in a claim against the reinsurer. The reinsurer had not been provided with notice of millions of dollars worth of asbestos claims that had developed over several decades. The only correspondence between the ceding insurer and the reinsurer reflected a small potential exposure in the early 1980s that did not indicate the possibility that involvement of the certificates might follow. In the early 2000s, the insured was facing tens of thousands of asbestos bodily injury claims, and the ceding insurer engaged in lengthy and complex settlement negotiations with its insured without providing notice to the reinsurer. Ruling in the reinsurer’s favor, the court looked to the purpose of the notice provision – to provide the reinsurer with an opportunity to associate in the control and settlement of claims, as well as to ensure that the reinsurer has sufficient information at its disposal to determine whether to avail itself of that opportunity. The court also concluded that the ceding insurer’s failure to provide notice to the reinsurer was a breach of its duty of utmost good faith. Granite State Insurance Co. v. Clearwater Insurance Co., Case No. 09-10607 (USDC S.D.N.Y Mar. 31, 2014).
This post written by Catherine Acree.
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SIXTH CIRCUIT REFUSES TO PERMIT JUDICIAL REVIEW PRIOR TO CONCLUSION OF REINSURANCE ARBITRATION PROCEEDING
The Sixth Circuit recently reversed a district court’s decision to stay arbitration proceedings in a dispute concerning allegations of overbilling on a reinsurance program. The arbitration clause from the treaty established a tripartite method of arbitration – one arbitrator selected by each side and one neutral umpire. During the course of the arbitration (and before rendition of a final award), one of the parties contended that its selected arbitrator had been disenfranchised by the other two arbitrators and that inappropriate ex parte communications had occurred. A lawsuit was filed in Michigan state court, seeking to vacate an interim award on the grounds that the two arbitrators had exceeded their authority under the treaty and that the umpire had displayed evident partiality. The case was removed to federal court, where the district court recast the challenge as a breach of contract dispute regarding the rules under which the arbitration was to proceed, and it granted an injunction to stay the arbitration. On appeal, the Sixth Circuit reversed, concluding that the district court erred by prematurely interjecting itself into the private dispute, noting that parties to an arbitration generally may not challenge the fairness of the proceedings or the partiality of the arbitrators until the conclusion of the arbitration and the rendition of a final award. The Sixth Circuit made a point to disagree with the district court’s application of 9 U.S.C. § 2, noting that “[n]othing in the text or history of the FAA suggests that § 2 was intended to displace § 10’s limitation on judicial review of non-final awards.” Savers Property & Casualty Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, PA, Nos. 13-2288/2289 (6th Cir. Apr. 9, 2014).
This post written by Catherine Acree.
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COURT DISMISSES CLAIM AGAINST AIG FOR BREACH OF REINSURNACE CONTRACTS
Reinsurer Transatlantic Reinsurance Company sued AIG and certain of its subsidiaries for a declaration that they breached various provisions of reinsurance certificates by transferring their risk under asbestos liability policies to another insurer. The court dismissed the claim against AIG, holding that it was undisputed that AIG itself was not a signatory to the reinsurance certificates at issue, and that the complaint failed to allege that AIG, as an “alter ego,” dominated and controlled the actions of the signatory AIG subsidiaries. The court was not persuaded into finding AIG liable by the contention that AIG was the party responsible for making the decision to transfer the insurance risk. The court explained that “TransRe’s allegations that AIG’s ‘de-risking’ strategy interfered with the Insureds’ abilities to meet their obligations under their contracts with TransRe do not permit this court to find that AIG has made a sham of the corporate formalities of the Insurers, as required to establish alter-ego liability.” Transatlantic Reinsurance Co. v. American International Group, Inc., et al., Case No. 152812/2013 (N.Y. Sup. Ct. Feb. 7, 2014).
This post written by Michael Wolgin.
See our disclaimer.