Granting a motion to enforce an arbitration award, the U.S. District Court for the Southern District of New York has held that a reinsurer is liable for a $5 million settlement entered into between a policyholder and the reinsurer’s retrocessionaire.
The action arises out of insurance policies issued to Companhia Siderurgica Nacional S.A. (“CSN”), which were reinsured by defendant, IRB Brasil Resseguros S.A. (“IRB”), and retroceded to plaintiff, National Indemnity Company (“NICO”). In settlement of an action between CSN and IRB arising out of a large loss suffered by CSN, the two executed an agreement in which they agreed that IRB had not retroceded CSN-related risks to NICO, and that IRB would cooperate in CSN’s effort to recoup a $9 million Premium that CSN had paid to NICO for the retrocessional coverage (the “Premium”). In a related arbitration between NICO and IRB, however, the panel subsequently issued an award holding that NICO was entitled to retain the Premium, and that IRB must hold harmless and indemnify NICO against CSN’s claim for repayment thereof (the “Award”). . While confirmation of the Award was pending, regarding liability for the Premium. CSN and NICO later settled that action for $5 million and agreed that, instead of NICO paying the $5 million from its own funds, NICO would seek a judgment against IRB based on its hold harmless and indemnity rights against IRB under the Award. The instant action followed.
On NICO’s motion to enforce the Award, IRB argued that the $5 million CSN-NICO settlement was not subject to the Award because it did not require NICO to pay CSN $5 million from its own funds. IRB argued that, under New York law, an insurer’s obligation to indemnify extends only to the damages the insured is legally obligated to pay. But the court rejected the argument, reasoning that IRB’s obligation to pay any amount NICO owed to CSN was embodied in a court-ordered judgment predating the CSN-NICO settlement. As such, it was irrelevant that the CSN-NICO settlement released NICO from any liability for the $5 million settlement. In addition, the court rejected IRB’s argument that the CSN-NICO settlement was unreasonable or was reached in bad faith, emphasizing that the $5 million was $4 million less than the $9 million Premium that IRB was actually required to indemnify.