PriceWaterhouse Coopers has published an interesting report on a survey that it conducted relating to US run-off operations. The report covers various aspects of run-off operations and strategies. Especially combined with the recent Lloyd’s report on capitalization and operation of Lloyd’s run-off syndicates, which was the subject of a post on this blog on May 28, this makes interesting reading.
Reinsurance Claims
UK COURT DECLINES TO FIND REINSURANCE COVERAGE DESPITE FOLLOW THE FORTUNES PROVISION SINCE DAMAGES OUTSIDE POLICY PERIOD
This case involves a situation in which a U.S. court found that an insurance policy covered a portion of damages incurred prior to and after a policy period based upon a manifestation coverage trigger. The insured then entered into a settlement agreement, and sought coverage from its reinsurers for the amount of the settlement. The resulting reinsurance dispute was litigated in a UK court. The UK court found that even though it was apparent that the insured had acted in good faith and prudently in negotiating the settlement to minimize its loss, the reinsurance did not cover damage that occurred outside the time period of the coverage of the reinsurance agreement. This decision illustrates an important area of risk for companies which may have their insurance and reinsurance governed by different applicable law, whether the laws of different U.S. states, which may have different coverage trigger or damage allocation theories, or the laws of a U.S. state and the UK. Care should be taken in establishing reinsurance programs to attempt to avoid such a scenario. Wasa International Ins. Co. v. Lexington Ins. Co., [2007] EWHC 896 (Queen’s Bench Commercial Court April 25, 2007).
COURT RULES ABSENT SHOWING OF PREJUDICE, REINSURERS REMAIN LIABLE TO INDEMNIFY INSUREDS DESPITE LATE NOTICE OF CLAIM
In 2002, the Kansas City Southern Railroad (“KCSR”) paid $37.5 million dollars to settle claims arising out of a fatal automobile accident. This case sub judice involved a dispute between KCSR’s captive insurer, TransFin Insurance Limited (“TransFin”), and TransFin’s reinsurers, Columbia Casualty and American Re-Insurance Company (together “the Reinsurers”), relating to coverage for this claim.
The Reinsurers claimed that they were not liable to indemnify TransFin on this claim because the underlying insured, KCSR, failed to meet the necessary conditions precedent required under their policy. The court disagreed, concluding that while KCSR failed to submit a claim in writing within the required policy period, they could take advantage of the relation-back procedure for claims made after the expiration of policies.
Having concluded that TransFin properly provided coverage on KCSR’s claim, the court addressed whether TransFin’s notice to its Reinsurers was late or otherwise inadequate and, if late, whether the Reinsurers must prove prejudice before they can successfully invoke the defense of late notice by the reinsured. The court stated that it did not need to decide whether notice was timely because even assuming it was, without demonstrating they suffered prejudice as a matter of law, the Reinsurers could not avoid coverage for late notice. Columbia Casualty v. TransFin Ins. Ltd., Case No. 2:05-CV-199 (USDC D. Vt. Apr. 27, 2007).
Court affirms summary judgment on reinsurance claims issue based upon res judicata
Two UK-based insurance companies, collectively known as Eagle Star, served as lead underwriter for a quota share reinsurance program reinsuring Legion Indemnity and Legion Insurance. A dispute arose over monies owed under the quota share reinsurance agreements. Legion Insurance was placed in rehabilitation in Pennsylvania, and an Illinois court placed Legion Indemnity under the control of the Illinois Commissioner of Insurance. Eagle Star filed an action against Legion in federal court. The Illinois court granted Eagle Star summary judgment, finding that the Pennsylvania court had determined the issue in Eagle Star's favor as to Legion Insurance, and that Legion Indemnity was bound by the decision based upon its privity with Legion Insurance and the doctrine of res judicata. The Court of Appeals affirmed. In re Liquidation of Legion Indemnity Company, Case No. 02-6695 (Ill. Ct.App. Mar. 29, 2007).
Court refuses to find fiduciary duty in reinsurance relationship
Employers Reinsurance Corporation (“ERC”) filed suit in Missouri federal court against its reinsured, Massachusetts Mutual Life Insurance Company (“MassMutual”) alleging that MassMutual breached the parties’ reinsurance agreement. MassMutual filed various counterclaims alleging that ERC breached the contract by failing to reimburse it for covered claims under the contract. ERC sought dismissal of MassMutual’s counterclaims for vexatious refusal under Missouri and Kansas law and breach of fiduciary duty.
In dismissing both vexatious refusal claims, the court did not reach the substantive issue of whether the Missouri and Kansas statutes apply to a reinsurance contract, but rather dismissed on the ground that Connecticut law, and not Missouri or Kansas law, applied to the parties’ reinsurance contract. Applying Connecticut law, the court also dismissed MassMutual’s claim for breach of fiduciary duty, concluding that the “defendant has failed to plead sufficient facts in its counterclaim supporting a fiduciary relationship between plaintiff and defendant.” Specifically, the defendants failed “to allege facts that there was a unique degree of trust and confidence between the parties or that plaintiff had superior knowledge, skill, or expertise.” The court added that “[c]considering that Connecticut courts have deemed that there is no fiduciary relationship between an individual policy holder and a sophisticated insurance company, they are not likely to imply one in a reinsurance relationship between two sophisticated insurance companies.” Employers Reinsurance Corp. v. Massachusetts Mutual Life Ins. Co., Case No. 06-0188-CV-W-FJG (W.D.Mo. April 10, 2007).