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).
Reinsurance Claims
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).
D&O CARRIERS NOT RESPONSIBLE FOR LOSSES SUSTAINED IN FRAUDULENT CONVEYANCE ACTIONS
A New Jersey federal judge ruled that an asset purchase agreement and a quota share reinsurance agreement did not obligate Hartford Fire Insurance Company (“Hartford”) and Twin City Insurance Company (“Twin City”) to step into the shoes of an insolvent insurer and provide coverage to Plaintiff for losses sustained in defending three fraudulent conveyance actions. The underlying fraudulent conveyance actions alleged that an ex-CEO played a shell game with the assets of GAF (the predecessor in interest to G-I) to shield itself from liability in pending asbestos litigation. The present action was originally filed against Reliance, but after Reliance filed for bankruptcy, Plaintiffs joined Hartford and Twin City, alleging that Defendants purchased the assets and renewal rights to Reliance’s D&O book of business and seeking coverage pursuant to that policy.
Ruling on competing summary judgment motions, the District Court said that Hartford and Twin City had no coverage obligation reasoning, among other things, that the “underlying fraudulent conveyance actions constitute a single claim that was first made under the Reliance Policy and before the inception of the Hartford/Twin City Policy” and that the Hartford/Twin City Policy and the Reliance Policy were two separate and distinct policies. G-I Holdings v. Hartford Fire Ins. Co., Case No. 00-6189 (D.N.J., Mar. 16, 2007).
RHODE ISLAND JOINS MAJORITY OF JURISDICTIONS REFUSING TO RECOGNIZE GENERAL DUTY OF DUE CARE FROM INDEPENDENT INSURANCE ADJUSTER TO INSURED
This case arose from an insured’s allegation that its insurer both failed to defend it from claims of breach and to indemnify it for a settlement within the policy’s aggregate limit. The insured also sued the insurer’s claims administrator, presenting the novel issue of whether an independent claims administrator can be liable to an insured for bad faith claims handling, tortious interference with contractual relations, or negligence.
Applying Rhode Island law, the District Court of Rhode Island concluded that the insured could maintain a common law claim for bad faith, but could not maintain a statutory cause of action for bad faith because the statutory language limited claims to “the insurer issuing the policy.” (Emphasis added). The court also permitted the insured to proceed with a claim for tortious interference with contractual relations. The court, however, concluded that the insured could not maintain a negligence claim because “…binding [the administrator] to a duty of reasonable care viz-a-viz the insured would be illogical…without, at a bare minimum, holding…the actual insurer to the same.” In so holding, Rhode Island joined the majority of jurisdictions that have refused to recognize a general duty of due care from an independent insurance adjuster or insurance adjusting company to the insured. Robertson Stephens, Inc. and Bank of America Corp. v. Chubb Corp., Case No. 05-00360 (D.R.I. Feb. 14, 2007) .
Silence Deemed Insufficient to Preclude Aggregate Liability
In a matter that is difficult to describe briefly, an arbitrator has entered an award in an interesting reinsurance claims issue, and the award has been confirmed. Gerling Global Reinsurance Corporation (“Gerling”) issued a certificate of facultative reinsurance to Employers’ Surplus Lines Insurance (“Employers”) reinsuring an Excess Umbrella policy providing for $5,000,000 per occurrence and aggregate losses. When Gerling refused to pay its pro rata share of certain indemnity and defense costs, Employers demanded arbitration to enforce the certificate. Gerling argued that a non-concurrency existed between the facultative certificate and the umbrella policy with regard to the aggregate liability and liability for defense costs. Gerling argued that the absence of the word “aggregate” in various sections of the certificate precluded consideration of aggregate limits of liability and that its reinsurance limits applied strictly on a per-occurrence basis. Gerling also argued that it was not required to reimburse Employers for the defense costs associated with the settlement because the “follow the settlements” clause in the certificate was subject to the condition that an indemnity payment must be made on a specific claim before any defense costs attached. Gerling argued that this language was non-concurrent with Employers’ ultimate net loss liability theory. While the arbitrator acknowledged that the presumption of concurrency is “not absolute and can be overridden by clear language of limitation in the certificate,” this was not such a case. The arbitrator concluded that the absence of the word “aggregate” was insufficient to preclude liability, stating that “silence, as an expression of limitation, strains credulity and is insufficient to preclude aggregate liability.” The arbitrator also noted Gerling’s failure to use any of the methods available to it to limit aggregate liability, such as including the phrase “Nil Aggregate” in the certificate or by adding an endorsement. With respect to liability for defense costs, the arbitrator concluded that Gerling misinterpreted the “follow the settlements” clause and that the concept of “ultimate net loss” contained in the Employers’ policy was entitled to the presumption of concurrence. As such, Gerling was responsible for its share of the defense costs. Employers’ Surplus Lines Insurance Co. v. Global Reinsurance Corp., Case No. 07-30 (USDC S.D.N.Y. Jan. 11, 2007).