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Reinsurance Claims

District Court Denies Summary Judgment to Trustee of Trust Account Maintained for Beneficiary of “Fronted” Reinsurance Program

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The U.S. District Court for the District of South Carolina denied summary judgment to the trustee of an account established pursuant to a “fronted” reinsurance program. The plaintiff, Accident Insurance Co. (AIC), participated in the program with non-party Freestone Insurance Co. Freestone paid AIC a fee to use its name and paper as a “front,” while bearing the actual risk of the fronted policies by reinsuring them under a “Program Agreement” with AIC. That agreement required Freestone to deposit funds into a separate trust account to be maintained by a trustee for AIC’s benefit. The defendant, U.S. Bank National Association, was the trustee. After Freeman went into receivership, AIC sued U.S. Bank for civil conspiracy and breach of fiduciary duty, among other things, after learning that nearly $7 million in trust assets seemingly disappeared. U.S. Bank moved for summary judgment on the civil conspiracy claim, arguing AIC could not have conspired with its wholly owned subsidiaries, and had no evidence of a “meeting of the minds” between these entities to “illegally transfer” trust assets. The court denied the motion, finding a genuine issue of fact as to each element of the civil conspiracy claim, and that breach of fiduciary duty is an independent tort that can give rise to a civil conspiracy claim under Delaware law.

Accident Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 3:16-cv-02621-JMC (D. S.C. Mar. 22, 2019).

Second Circuit Rejects Claims Against Insurer for Settlement Using Policy Funds

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Three plaintiffs—a subcontractor (HBI), an affiliated entity (Keller Foundations), and their parent (Keller Group)—brought a claim against Zurich, which had issued a liability policy (the Policy) to the Keller Foundations for which HBI was an additional insured. A general contractor (Diaz) sued HBI in one lawsuit and Zurich in another, claiming that Zurich should defend it in the first lawsuit because it was an additional insured under the Policy. Zurich settled the lawsuit by paying Diaz $450,000. Zurich then sought and received reimbursement from Capital, a captive reinsurer owned by plaintiff Keller Group. Claiming that Zurich’s payment to Diaz was not covered by the Policy, plaintiff brought causes of action for breach of contract, breach of the duty of good faith, and declaratory relief. Zurich filed a motion to dismiss all claims, which the trial court granted, and plaintiffs appealed.

The Second Circuit affirmed the dismissal. First, the court found that plaintiffs had not plausibly alleged a breach of the Policy, as Zurich had broad discretion to settle claims and plaintiffs were not directly harmed by Zurich’s decision to settle the claim, even if they had to reimburse Capital for its reimbursement of Zurich. As the court explained, plaintiffs’ payments to Capital did not relate to Zurich’s duties under the Policy, but instead “flow from Capital’s choice to reimburse Zurich under the Reinsurance Agreement, as well as whatever arrangements exist for inter-company reimbursements between Keller Group and its subsidiaries.” Any complaint regarding Capital’s obligation to reimburse Zurich was Capitals’ to make, not Plaintiffs’.

Second, as to the claim for breach of the duty of good faith, the court found that Zurich’s decision to settle the Diaz claim was not arbitrary and unreasonable, and again emphasized that plaintiffs had not plausibly alleged that this decision deprived them of the benefits of the Policy. Finally, the court rejected the request for declaratory relief, finding that plaintiffs had failed to plead any facts demonstrating even a possibility that Zurich’s payment to Diaz would cause the Policy’s $5 million cap to be exhausted and thus cause plaintiffs to lose the benefit of the Policy.

Keller Foundations, LLC et. al v. Zurich American Insurance Company, 18-1280-cv (2d Cir. Dec. 6, 2018)

DC District Court Permits Vantage Commodities To File Amended Complaint And Denies Reinsurer Defendants’ Motion For Interlocutory Appeal

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The District Court for the District of Columbia issued an order denying a motion to reconsider its prior order allowing Vantage Commodities to file an amended complaint and denying the reinsurer defendants’ motion for interlocutory appeal. In the underlying decision, the court determined that, while Vantage had not stated a claim for breach of contract because it had failed to allege facts showing a contractual relationship, the complaint adequately stated claims for breach of implied contract, promissory estoppel, and unjust enrichment.

The court found that Vantage had alleged enough facts to survive a motion to dismiss, noting that the court was required to draw all reasonable inferences in Vantage’s favor at the motion to dismiss stage. That determination was limited to the specific allegations in Vantage’s amended complaint, and did not “create new law.”

The court refused to exercise its discretion to allow an interlocutory appeal of its non-final order, finding that the questions of law the reinsurers presented were “tied up in the specific facts of this case.” Furthermore, while the reinsurers argued that the court’s prior order “goes against the weight of authority in reinsurance law that an insured cannot maintain a direct action against a reinsurer,” they failed to cite any specific case law showing that the court’s order was in conflict with other authorities. The court concluded that the reinsurer defendants did not meet their burden of showing that the circumstances of this case justified a departure from the basic policy of postponing appellate review until after the entry of final judgment. For more information regarding this case, see our prior posts here and here.

Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, Case No. 1:17-CV-01451 (USDC D.D.C. Jan. 17, 2019).

Federal Court Denies Bifurcation of Contract Claims and Uberrimae Fidei and Late Notice Defenses in Reinsurance Dispute

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A Michigan federal court declined to bifurcate a case involving a contract dispute between a ceding insurer, Amerisure, and its reinsurer, Transatlantic Re, in a case arising from underlying asbestos claims dating back to the early 1980’s.

Amerisure sued TransRe alleging that it failed to reimburse Amerisure under a facultative reinsurance agreement covering losses and loss expenses arising from underlying asbestos claim liabilities insured by Amerisure. For its part, TransRe alleged that Amerisure breached the “duty of utmost good faith” by failing to apprise TransRe of all relevant information in its underwriting of the facultative agreement, thereby voiding the agreement. TransRe also claimed that Amerisure’s claim is barred due to late notice.

Amerisure filed a motion to bifurcate the proceedings to address the contract issues first. TransRe opposed the motion arguing that even if the contract issues were resolved, the breach of duty of utmost good faith and late notice issues would remain to be addressed, and thus bifurcation would not result in a more efficient proceeding.

The trial judge referred the issue to a special master, who found that bifurcation was inappropriate, as a phased proceeding would not result in convenience to the parties or judicial efficiency. The report noted that much of the discovery involved on the contract issues would overlap with the issues involved in TransRe’s defense based on breach of the duty of utmost good faith, such as the underwriting intent and meaning of the applicable policy or reinsurance language. The report concluded, therefore, that phasing the proceedings might ultimately be less efficient, rather than more efficient, and recommended denial of the motion.

The judge accepted the special master’s recommendation and denied Amerisure’s motion.

Amerisure Mut. Ins. Co. v. Transatlantic Reinsurance Co., No. 2:18-cv-11966 (USDC E.D. Mich., Nov. 29, 2018 (Report and Recommendation of Special Master), Dec. 20, 2018 (adopting report)).

This post written by John Pitblado.

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Applied Underwriters Defeats Motion for Summary Judgment in Suit Over Breach of Reinsurance Participation Agreement

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Applied Underwriters Captive Risk Assurance Company, Inc. (Applied) defeated a motion for summary judgment filed by Beemac Driver Management, LLC (Beemac), in a lawsuit precipitated by Beemac’s alleged failure to pay either the $142,797.91 due under a “reinsurance participation agreement,” or the $253,287 early cancellation fee that resulted when Beemac refused to pay the amount due. The court stated it was “apparent that calculation of the amount due pursuant to the parties’ agreement is not [] simple … [nor was it] at all apparent from the pleadings and evidence how the plaintiff calculated the amount due – only that the plaintiff claims there is an amount due and owing.” The court noted that Beemac’s argument rested on the premise that miscalculating the amount due “was a prior material breach of the agreement, excusing their own subsequent failure to perform,” but that Beemac offered no authority to support that position. In addition, Beemac offered no calculation of the correct amount it contended was due under the contract. On these facts, the court could not conclude as a matter of law that Applied’s billing, even if inaccurate, was a material breach.

Beemac also sought to strike the affidavit of Applied’s chief actuary regarding the factors Applied used to determine the amount due under the reinsurance participation agreement. Beemac argued that Applied either failed to disclose the expert witness prior to the expert disclosure deadline or, if the witness was not an expert, that her testimony concerned contract interpretation, which is determined by the court as a matter of law. The court disagreed, stating that although Applied’s chief actuary might be an expert, in this particular matter she was not providing her opinions and conclusions based on her experience, skill and training, as an “expert witness” would testify. Rather, she was testifying regarding her personal knowledge of her employer’s business practices, rendering her a lay opinion witness. As a result, the motion to strike her affidavit was denied. Applied Underwriters Captive Risk Assurance Co., Inc. v. Beemac Driver Mgmt., LLC, Case No. 8:16-CV-382 (USDC D. Neb. Dec. 6, 2018).

This post written by Benjamin E. Stearns.

See our disclaimer.