A Pennsylvania district court dismissed bad faith and fiduciary duty claims brought by a reinsurer against a cedent’s corporate parents. Plaintiff, Gaffer Insurance Company, reinsured policies issued by Discover Re, a subsidiary of U.S. Fidelity and Guaranty Co., which is in turn a subsidiary of St. Paul Travelers Cos. Inc. Pursuant to the agreement, Gaffer posted $4 million dollars to secure its obligations. When the agreement terminated and Gaffer asked Discover to release up to 3.8 million of those funds, Discover never responded. Gaffer filed suit and the defendants moved to dismiss for failure to state a claim, or alternatively, to compel arbitration.
The court ordered arbitration between Gaffer and Discover Re pursuant to the agreement’s arbitration provision. With respect to Gaffer’s claims against Discover Re’s parent companies, the court concluded that Gaffer failed to state a claim against those defendants. Specifically, the court concluded that Pennsylvania’s bad faith statute does not apply to reinsurance agreements, and added that the statute was intended to protect consumers from insurers, not to protect “two sophisticated, bargaining parties from one another.” The court also dismissed the good faith and fair dealing claim against the parent companies. Finally, the court dismissed the breach of fiduciary duty and negligence claims against the parent companies finding that as a reinsurer, Gaffer is not covered by the fiduciary duties owed by an insurer to an insured. Gaffer v. Discover Reinsurance Co., Case No. 3:07-CV-00580 (M.D. Pa., Oct. 10, 2007).