Reinsurance Claims

CASE UPDATE: ENGLISH COURT OF APPEAL REVERSES DECISION DENYING REINSURANCE COVERAGE, MARKING DEPARTURE FROM TRADITIONAL FOLLOW THE SETTLEMENTS RULINGS

April 8, 2008 by Carlton Fields

In a May 23, 2007 post, we reported on a UK decision denying reinsurance coverage despite a follow the fortunes provision based on a finding that the damages occurred outside the coverage period of the reinsurance, despite the conclusion of a US court on the underlying claim finding liability for damage occurring outside the coverage period of the underlying policy. The UK Court of Appeals has allowed an appeal, finding that the coverage provision of the reinsurance should be interpreted in the same manner as the coverage provision in the underlying insurance.

The English appellate court agreed that the insurance and reinsurance contracts were not entirely “back to back” in terms of the coverage periods, but concluded that although there were some differences in the contracts, the parties intended that they should have the same effect and therefore, the reinsured’s settlement of the insurance claim did fall within the terms of the reinsurance contract. Despite the fact that the reinsurance appeared only to cover damage that occurred during the period of the reinsurance, and the trigger of coverage used by the US court permitted a broader recovery from the insurer, the Court of Appeals accepted the proposition that “the same or equivalent [coverage] wordings should be given the same meaning in the reinsurance contract as in the insurance contract.”

Explaining that the UK reinsurer had taken certain known risks in reinsuring a US insurer, the Court concluded that although the judgment against the insured was not one which the reinsurers expected, nevertheless it was one which was a possibility that they agreed to cover. This decision marks a departure from previous ‘follow the settlement’ cases involving differences in the insurance and reinsurance contracts, which have typically been resolved in favor of the reinsurers. Wasa International Ins. Co. v. Lexington Ins. Co., [2008] EWCA Civ 150 (Feb. 29, 2008).

This post written by Lynn Hawkins.

COURT INTERPRETS REINSURANCE AGREEMENT LIABILITY LIMIT IN SUMMARY JUDGMENT SETTING

April 7, 2008 by Carlton Fields

A district court has interpreted the liability limit of a reinsurance agreement in a summary judgment setting, finding the language to be unambiguous, and finding in favor of the position advanced by the reinsured. The opinion contains a good discussion of the rules for interpreting reinsurance agreements. Princeton Ins. Co. v. Converium Reinsurance (North America) Inc., Case No. 06-599 (USDC D. N.J. Mar. 27, 2008).

This post written by Rollie Goss.

COURT DECLINES TO DISMISS COMPLAINT REGARDING LETTER OF CREDIT POSTED AS SECURITY FOR REINSURANCE

March 25, 2008 by Carlton Fields

Letters of credit were posted as security for a loss fund in an off-short based rent-a-captive reinsurance program. When the reinsurance program ended, and the remaining claims were finalized, it was agreed that the obligors on the letters of credit had satisfied their obligations under the program and that the letters of credit should be returned. The party holding the letters of credit contended, however, that they were legally entitled to retain the letters of credit for use in unrelated rent-a-captive programs. The obligors sued, seeking damages for the failure to release the letters of credit, alleging breach of fiduciary duty and violation of Connecticut’s Unfair Trade Practices Act. The district court denied a motion to dismiss, relying upon the fact that the letters of credit were the property of the obligors, but that the holder was exercising complete control over the instruments. WEB Management LLC v. Arrowood Indemnity Co., Case No. 07-424 (USDC D. Conn. Mar. 5, 2008).

This post written by Rollie Goss.

‘FOLLOW THE SETTLEMENTS’ LIMITED TO COVER PROVIDED BY SLIP’S TERMS

February 25, 2008 by Carlton Fields

According to a recent decision from the UK Commercial Court, a reinsurer’s obligation to “follow the settlements” of its cedent does not apply when the reinsurance contract contains terms making its scope narrower than the original policy. In this case, the cedent, Aegis, sought to recover from its reinsurer, Continental Casualty Company (“CCC”), for claims arising from incidents at an oil refinery. Aegis had settled the claims made by the refinery owner. CCC denied the claim relying on the fact that additional conditions and definitions relating to boiler and machinery cover were attached to the slip which, if found to apply to the entire contract, would exclude recovery. The same definitions did not appear in the underlying policy. The Court found against Aegis on the issue of contract interpretation, and held that since the original policy and the reinsurance policy were not entirely “back to back,” Aegis could not rely on the follow the settlements provision. Aegis Electrical and Gas International Services Co. Ltd. v. Continental Casualty Company, [2007] EWHC 1762 (Comm. July 25, 2007). This opinion is not available on the UK Court site, but is available on WESTLAW at 2007 WL 2041964.

This post written by Lynn Hawkins.

CASE UPDATE: TRIAL REQUIRED TO DETERMINE ISSUES OF BAD FAITH OR EX GRATIA PAYMENTS

February 7, 2008 by Carlton Fields

On November 3, 2006 we reported on a decision of a New York state court that followed the follow-the-fortunes provision of a reinsurance agreement, granting summary judgment as to the majority of the reinsurance claims. A New York appellate court recently reversed that decision, revisiting the scope of the follow-the-fortunes doctrine and ex gratia exceptions under New York reinsurance law. The court found that the general “follow-the-fortunes” obligation comes with exceptions for claim payments that are “fraudulent, collusive or otherwise made in bad faith” or are “ex gratia.” Ex gratia payments are payments made by a cedent insurer “that recognizes no legal obligation to pay, but makes payment to avoid greater expense, as in the case of a settlement by an insurance company to avoid the cost of a suit.”

The reinsurer in this case contended that, years after making settlements in thousands of pesticide poisoning cases, the cedent’s parent company reallocated some of its settlement payments from sister companies to the cedent/plaintiff just to obtain the benefit of the reinsurance coverage. The reinsurer charged that the cedent insurance company's conduct constituted bad faith or at least an ex gratia payment that should relieve the reinsurer of any obligation as a matter of law on summary judgment. The New York appellate court disagreed, finding that issues as to the intent and circumstances of the underlying settlements remained unresolved, requiring a trial. Granite State Ins. Co. v. ACE American Reinsurance Co., 2007 NY Slip Op. 10464 (NY App. Div., Dec. 27, 2007).

This post written by Lynn Hawkins.