In my latest IRMI.com Expert Commentary – Reinsurance, I discuss Special Termination provisions in reinsurance contracts and what they mean. You can access the Commentary here.
Special Termination Provisions in Reinsurance Contracts
Sixth Circuit Affirms Collateral Estoppel in Favor of Reinsurer
Asbestos claims continue to spawn reinsurance disputes over facultative reinsurance coverage of expenses in addition to the limits. What happens when the issue is decided in an arbitration between a ceding insurer and one reinsurer and the ceding insurer raises the same issue against another reinsurer in a subsequent litigation?
Read more: Sixth Circuit Affirms Collateral Estoppel in Favor of ReinsurerIn Amerisure Mutual Insurance Co. v. Swiss Reinsurance America Corp., No. 24-1492 (6th Cir. Nov. 4, 2025) (Not Recommended for Publication), the circuit court affirmed an order of the district court granting a reinsurer’s motion for summary judgment based on collateral estoppel. The dispute was over expenses in addition to the limits for defending asbestos cases against the underlying insured. The ceding insurer issued primary and umbrella policies and reinsured the umbrella policies with the reinsurer under facultative certificates.
The real issue here is the ceding insurer’s prior arbitration with another facultative reinsurer where the arbitration panel in its final award held that the reinsurer did not have to pay expenses outside the limits of the umbrella policies under the facultative certificates. Subsequent to that arbitration the ceding insurer sought judicial confirmation of the award (based on other elements of the award that were favorable to the ceding insurer).
When the ceding insurer brought the underlying action against the second reinsurer arguing the same issue concerning whether the facultative certificate had to pay the umbrella expenses in addition to the limits, the reinsurer countered with a motion for summary judgment for collateral estoppel based on the prior arbitration award that was confirmed in court. The district court agreed and granted the reinsurer summary judgment.
On appeal, the Sixth Circuit affirmed. While the opinion is not recommended for publication and is therefore not precedent, the court provides a clear roadmap for analyzing whether a prior arbitration award in favor of a different reinsurer can support collateral estoppel for a different but similarly situated reinsurer so it is worth the read.
In essence, the court found that all the elements of collateral estoppel or issue preclusion applied and rejected the ceding insurer’s arguments to the contrary. The court found that the main issue being litigated — whether the ceding insurer’s reinsurers must reimburse it for defense costs it paid to its insured over the umbrella limits — was raised and actually litigated in the earlier arbitration. The court found that the arbitration record and award indicate that the umbrella drop-down provision was necessarily decided against the ceding insurer even though it was not expressly mentioned in the award.
The court found that the ceding insurer had the opportunity to fully and fairly litigate the defense cost issue in the arbitration. It noted that the ceding insurer sought to confirm the award and rejected the ceding insurer’s argument that the limited opportunity to “appeal” an arbitration award should preclude collateral estoppel. The court also rejected the ceding insurer’s argument that the “honorable engagement clause” and the difference in how an arbitration is conducted compared to a court proceeding should preclude collateral estoppel. The court noted that the ceding insurer had not shown the arbitration to be unfair or that the decision was unreliable.
The court also rejected the argument that mutuality of estoppel precluded collateral estoppel finding that the ceding insurer’s argumentative posture in both proceedings was the same. The court held that requiring mutuality would encourage gamesmanship.
At bottom the court held that precluding the ceding insurer from relitigating the same issue against the second reinsurer served an essential purpose of the collateral estoppel doctrine, which is to promote judicial economy by preventing needless litigation.
Auto Service Contract and Warranty Reinsurance Deal Results In a Default Judgment
What happens when you enter into a fronting deal with an offshore reinsurer owned by car dealerships? Sometimes you get to go to court.
Read more: Auto Service Contract and Warranty Reinsurance Deal Results In a Default JudgmentIn Wesco Insurance Co. v. Sunfund Reinsurance Ltd., No. 653136/2024 (N.Y. Sup. Ct. N.Y. Co. Jul. 23, 2025), a cedent entered into a 100% quota share reinsurance contract with a Turks & Caicos domiciled reinsurer covering vehicle service contracts and limited warranties. The reinsurance contract required a trust fund to secure the reinsurer’s liabilities. Claims came in, the trust fund was not funded, and requests for payment of claims in excess of premium go unheeded. Some of you might have heard this story before.
The cedent brought a breach of contract action and sought a conditional dismissal for the reinsurer’s failure to comply with New York Insurance Law section 1213(c) (requiring a New York license or security to file an answer). The cedent then moved for a default judgment when the conditional order under 1213(c) was not met.
In granting the default judgment the court found that the cedent met the requirements for breach of contract and specific performance for funding the trust fund (after payment of the outstanding losses). The court also granted attorney fees (specifically allowed by the reinsurance contract) but gave a 10% haircut to the cedent’s attorney fees for block billing and a lack of detail in some of the time entries.
None of this is surprising, but there are a few things to note. If you are going to do business with a captive off-shore reinsurer you might want to have the trust fund collateralized up front before any business is written to the reinsurance contract. Second, if you want attorney fees, be reasonable and have descriptive time entries showing the value of the legal work performed. Finally, while a default judgment is nice it does not pay any bills. Now you have to collect the judgment against an off-shore undercapitalized reinsurer or chase its principals under an alter-ego theory to breach the corporate veil. That too costs money.
Third Circuit Finds Omission of Historical Loss Reserves Potentially Material In a Securities Fraud Case Against a Reinsurer
As most people involved in insurance and reinsurance know, historical loss experience is key to underwriting and pricing reinsurance coverage. One would think the same would be true for investors in a reinsurance company. In a recent case, a federal appeals court addressed an appeal of a summary judgment motion in favor of the reinsurer against investors in a securities fraud case focused on the omission of historical loss reserves in the reinsurer’s public filings.
Read more: Third Circuit Finds Omission of Historical Loss Reserves Potentially Material In a Securities Fraud Case Against a ReinsurerIn In re: Maiden Holdings, Ltd. Securities Litigation, No. 24:1118 (3rd Cir. Aug. 20, 2025), the Third Circuit Court of Appeals reversed the district court’s order granting summary judgment dismissing a securities fraud case. The case focused on whether the reinsurer’s knowledge of historical loss reserves of certain business assumed from its ceding insurer and its omission to disclose that information in public filings was material under the federal securities laws.
Others have digested and analyzed this case from a securities law and fraud perspective. I won’t do that here (I am not a securities lawyer). My focus is on the loss reserve and reinsurance part of the case. What was involved here was historical loss reserve information about a large segment of the reinsurer’s assumed liabilities from a particular ceding insurer and whether that information should have been disclosed in public filings.
The opinion has several interesting observations. For example, the court described reinsurance and loss reserves and also discussed the complexities of actuarial analysis.
Reinsurance is the business of insuring insurance companies. Therefore, just like any other insurance company, reinsurers have to set aside funds to pay out future claims. These set-aside funds, known as “loss reserves,” are the product of “an insurer’s actuarial judgment” and are generally calculated based on many factors. (citation omitted). Because reserves represent predicted losses, they are effectively removed from an insurer’s operating income and treated as liabilities in financial reports. A company that sets its loss reserves too low effectively understates its liabilities, thus inflating its perceived financial strength.
In reframing and answering the legal question, the court said:
The critical question is whether the omitted historical loss data was material. Reading the record in the light most favorable to [the plaintiff], a reasonable factfinder could find that it was.
The key was that the evidence was sufficient to show that the reinsurer knew and considered the adverse loss data, but in calculating its reserves for public filing purposes chose a different reserve pick. The court pointed out that the cedent’s business was the reinsurer’s largest client relationship, that the reinsurer had access to the negative historical data, and that historical loss data was an important part of the reinsurer’s loss reserve estimation process.
. . . viewed holistically, the evidence in the current record provides the full
“context” necessary to raise a genuine issue of material fact as to whether the omission of [the ceding company’]s historical loss data was material. There is evidence that [the reinsurer’s] business depended on [the cedent} and that historical trends were one of the most significant considerations when [the reinsurer] set reserves.
Essentially, the court rejected the argument that because the reinsurer considered the historical loss data and calculated its reserves differently, there was no actionable case. The court reversed summary judgment and allowed discovery to proceed at the district court level.
Who Knows What Matters When It Comes to Risk Exposures
In my latest Expert Commentary on Reinsurance for IRMI.com, I discuss the issue of whose knowledge controls when there is an exclusion in a reinsurance contract that triggers on known exposure. See what you think and let me know.
You can read the Commentary here by signing onto IRMI.com.
Fifth Circuit Reverses on Late Notice Defense Giving Reinsurer a Victory
Late notice of claim has been a difficult defense for reinsurers to sustain. But when the delay in notice is objectively unreasonable and material, it may be, as the Fifth Circuit recently found, a breach of the reinsurance contract enough to absolve the reinsurer of its duty to indemnify.
Read more: Fifth Circuit Reverses on Late Notice Defense Giving Reinsurer a VictoryIn United States Fire Insurance Co. v. Unified Life Insurance Co., No. 24-10292 (5th Cir. Aug. 14, 2025), a dispute arose involving reinsurance for a short term medical insurance claim. The underlying insured disputed the cedent’s determination on usual and customary charges and litigation ensued culminating in a class action. The cedent did not notify the reinsurer about the claim and the litigation until December 2019, although the underlying litigation commenced in April 2017. Despite taking actions that the reinsurer suggested, the cedent was unsuccessful in the underlying litigation and ultimately settled the claim. The reinsurer denied the claim based on late notice.
The reinsurer brought this action to declare that notice of the underlying litigation was untimely and prejudicial. On cross-motions for summary judgment, a magistrate judge ruled for the cedent on its counterclaim using a subjective notice test and, alternatively, found no prejudice. The reinsurer appealed.
On appeal, the 5th Circuit reversed, holding that the delay was objectively unreasonable and material and that it breached the reinsurance contract. Treaty required the cedent to give prompt notice to the reinsurer “of all Claims which, in the opinion of [the cedent], may result in a claim hereunder …. ” The issue in dispute was whether notice was required based on a subjective or objective standard of what the cedent believed.
In reversing the district court, the circuit court found that in considering the question of “whether the phrase ‘”in the opinion of’ departs from an objectively determined duty to notify, [w]e hold that the Treaty did not depart from the ordinary rule.”
We reject a subjective standard in favor of an objective one for three reasons. First, an objective reading best interprets the Treaty as a whole and in light of background principles of quota share treaty reinsurance. Second, Texas authority, albeit sparse, suggests that Texas courts would agree that an objective standard controls. Third, most other jurisdictions faced with similar provisions apply an objective standard.
In describing the notice provision in the reinsurance contract, the court stated as follows:
This notice provision, particularly in this quota share reinsurance contract, enables the reinsurer to assess its exposure for financial and underwriting purposes, and to participate in defending a claim as authorized by the Treaty. Notice is only valuable if it arrives “promptly,” in time for action. The sophisticated parties to this agreement had to assume that “the opinion of’ [the cedent], even if “subjective,” would be grounded in its professional experience and familiarity with potential claims. Objective reality, in other words, was implicit in [the cedent]’s opinion. From this standpoint, referencing [the cedent]’s opinion of a potential claim actually reinforces what should be an objective standard for the duty to notify. The phrase “in Unified’s opinion” is best interpreted to harmonize with the objective standard expressly connoted by the stock phrase requiring prompt notice “of all Claims which … may result in a Claim” under the Treaty.
The court held that
Based on an interpretation of the provision that makes sense of the whole policy and background reinsurance principles, the arguable support of Texas cases, and the interest in uniformity, we conclude that the Treaty provision required [the cedent] to provide prompt notice to [the reinsurer] of what a reasonable reinsured would believe “may result in a claim” under the Treaty.
Having found what the notice clause required, the court went on to hold that the cedent breached the notice provision. First the court considered when a reasonable cedent would have known that its duty to provide prompt notice of the underlying litigation was triggered and whether the cedent’s notice was reasonably prompt after that point. The court held that notice was not reasonably prompt based on the facts.
The court also held that the unreasonable notice was prejudicial to the reinsurer based on a material breach of the reinsurance contract.
. . . we hold that [the reinsurer]’s right to assist in [the cedent]’s defense of the [underlying] litigation was severely prejudiced when [the cedent] provided notice after summary judgment had been awarded to the individual plaintiffs, after a class was certified, and after a petition for interlocutory appeal on class certification was denied.
* * *
Based on these facts, [the reinsurer] was plainly deprived of the benefit it expected from the Treaty’s notice provision. [The reinsurer] was prejudiced in several concrete ways by deprivation of its Treaty right to assist [the cedent]’s defense. Because it did not receive notice until after an adverse summary judgment, the defendant’s ability to introduce new expert testimony or obtain a different disposition was radically narrowed. [The reinsuer]’s receipt of notice after summary judgment was more prejudicial than notice given with trial “rapidly approaching.” (citations omitted).
The opinion outlines in detail why there was prejudice based on the specific facts of the case. It provides a roadmap to reinsurers who believe that they have been prejudiced by late notice. It is always better to give notice early and often rather than wait for an adverse ruling, particularly one that objectively precludes a reinsurer from associating in the defense of the claim.
Discovery of Reinsurance Information Rolls On
Policyholders and claimants seeking to access reinsurance contracts and other reinsurance information and communications to support their claims continues to take up plenty of judicial time. Courts are split on the issues, but the issues are all fact-dependent. In this post, I discuss two cases from this year where both courts granted motions seeking to disclose reinsurance information.
Read more: Discovery of Reinsurance Information Rolls OnIn Divinity v. Bridgefield Casualty Insurance Co., 3:24-cv-00522-LGI (S.D. Miss. Apr. 28, 2025), a pro se plaintiff, among other things, requested production of its insurer’s reinsurance agreement. The insurer moved to limit the disclosure of the reinsurance agreement. The insured sought the reinsurance agreement as relevant to the claim for bad faith coverage denial. The dispute centered on the initial disclosure requirement in Federal Rule of Procedure 26(a)(1)(A)(iv), which requires disclosure of
any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.
In denying the insurer’s motion to limit disclosure, the court held that “[the insurer] is self-insured and could satisfy the full amount of damages sought by Plaintiff is not a sufficient reason to excuse disclosure of [ the insurer’s] reinsurance agreement.” The court cited other cases where courts have held reinsurance agreements fit within the scope of 26(a)(1)(A)(iv) and found that it would not be burdensome for the insurer to produce the reinsurance agreement.
In Sinclair, Inc. v. Continental Casualty Co., No. 1:24-cv-03003-SAG (D. Md. Apr. 28, 2025), a coverage dispute arose over a cyber loss when the insurers denied coverage. A magistrate judge was asked to address a number of discovery disputes, including the policyholder’s request for production of reinsurance agreements and communications concerning reinsurance for cyber claims. The policyholder argued that the reinsurance information was relevant to its claim for bad faith.
While noting the diversity of decisions among the courts, the magistrate judge ultimately ruled that “that the reinsurance policies, as well as related documents and communications, are relevant to [the policyholder’s] bad faith claim and should be produced.” But because of the broadness of the document request, the court limited what information needed to be produced:
The Court will therefore limit Request No. 20 to all documents and communications shared between [the insurer] and [its] reinsurer(s)retrocessionaire(s), or their representatives, concerning the cyber claim, the [insurer’s] policy, or any reinsurance policy providing coverage to [the insurer] for [the policyholder’s] cyber claim.
What we glean from these cases is that courts seem to think reinsurance agreements are relevant to bad faith claims handling coverage disputes but will limit the information disclosed to those agreements and communications concerning the claim in dispute.
Texas Federal Court Allows Direct Action Against Reinsurer to Continue Under an Implied Agreement
Traditionally, a policyholder cannot sue a reinsurer without privity of contract or some exceptional circumstance. In a recent case, a Texas federal court denied a motion to dismiss the complaint filed by a policyholder against a reinsurer based on a finding that there was an implied agreement based on course of conduct.
Read more: Texas Federal Court Allows Direct Action Against Reinsurer to Continue Under an Implied AgreementIn Indorama Ventures Holdings L.P. v. Factory Mutual Insurance Co., No. 1:24-cv-00404 (E.D. Tex. Aug. 7, 2025), the policyholder brought a breach of contract and declaratory judgment action to recover the full value of business interruption losses caused by an explosion. The policyholder had already recovered $50 million and was seeking an additional $50 million. The reinsurer moved to dismiss the complaint for failure to state a cause of action (no right to sue the reinsurer).
The facts indicate that the property and business interruption policy was issued by a captive insurer and reinsured by the reinsurer. But the reinsurer was the party who was obligated to adjust and pay any claims. In fact, the reinsurer adjusted and paid the first $50 million claim. The policy was originally issued to a third-party that the policyholder purchased, and the parties signed an insurance assignment agreement. That assignment agreement was agreed to by the reinsurer, which acknowledged its role in adjusting and paying claims directly to the policyholder.
Ultimately, the court denied the motion to dismiss the complaint. The court found that the reinsurance agreement was outside the complaint and did not need to be considered. But even if the reinsurance agreement was considered by the court, the complaint still stated a cause of action. Why, because of a Texas law.
The relevant law was Texas Insurance Code Ann. § 493.055, entitled “Limitation on the Rights Against Reinsurer,” which provides that:
A person does not have a right against a reinsurer that is not specifically stated in:
(1) the reinsurance contract; or
(2) a specific agreement between the reinsurer and the person.
As the court found, “[]he relevant ‘right’ in this case is [the policyholder’s] right to sue [the reinsurer] directly.” That right, held the court, did not exist under the reinsurance agreement.
First stop, § 493.055(1). The Reinsurance Agreement clearly forecloses [the policyholder’s] right to directly sue. A section entitled “B. Cooperation of the Company” cabins the rights created by the Reinsurance Agreement: “In no event shall anyone other than [the cedent] or, in the event of [the cedent’s] insolvency, its receiver, liquidator, or statutory successor, have any rights under this Agreement.” A separate section entitled “X. Exclusive Contract” similarly provides that “[i]n no event shall any party, other than [the cedent], or in the event of [the cedent’s] insolvency, its liquidator, have any rights against [the reinsurer] under this Reinsurance Agreement.”
But that was not the end of the inquiry. Under subsection (2) of the statute, if there is a “specific agreement” between the reinsurer and the policyholder, then a direct action is possible. Ultimately, the court determined that a specific agreement existed based on course of conduct. The court’s rationale was based on its view that the Texas Supreme Court would find that an “agreement” included an agreement based on course of conduct and that the facts pled, including certain adjustment communications attached to the motion, and the insurance assignment agreement, demonstrated course of conduct leading to an agreement between the reinsurer and the policyholder that the reinsurer would adjust and pay claims under the property policy.
In denying the motion to dismiss, the court held that the policyholder has sufficiently pled a right to sue the reinsurer directly based on an implied agreement outside the reinsurance agreement.
This could not have been a shock to the reinsurer given the insurance assignment agreement and its role in adjusting and paying the claims. But as the court stated, there are some factual issues and those will come out in summary judgment or trial if the case gets that far (which it might given the $50 million claim).
Out of Alignment: When Reinsurance Contracts Are Not Synced with the Policies Reinsured
My latest IRMI.com Expert Commentary on Reinsurance discusses what can happen when reinsurance contracts are out of alignment with the policies reinsured. You can read the commentary here.
Second Circuit Reverses Reverse Preemption
For decades, those seeking to enforce arbitration clauses in insurance policies have, in certain states, faced a major obstacle: reverse preemption. Reverse preemption is essentially using a state law precluding arbitration clauses in insurance policies to override — or reverse preempt — enforceability of arbitration through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) based on the McCarran-Ferguson Act, which allows state insurance laws that regulate the business of insurance to override general federal laws that are not specific to insurance and, in the case of an international treaty, that are not self-executing. The Second Circuit Court of Appeals, since 1995, has held that the New York Convention was not self-executing. That holding has now been reversed.
Read more: Second Circuit Reverses Reverse PreemptionIn Certain Underwriters at Lloyd’s, London v. 3131 Veterans Blvd LLC, Nos. 23-1268-cv and 23-7613-cv (2d Cir. May 8, 2025), a surplus lines insurer issued policies to two insureds with identical arbitration clauses. The insureds sued the insurer in state court in Louisiana over hurricane losses and the insurers sued in New York federal court to compel arbitration under Chapter 2 of the Federal Arbitration Act and the New York Convention. The insureds argued reverse preemption to dismiss the cases. Both of the underlying decisions held in favor of the anti-arbitration provisions in Louisiana’s insurance law based on reverse preemption and the Second Circuit’s holding in Stephens v. American International Insurance Co., 66 F.3d 41 (2d Cir. 1995), and denied the insurer’s petitions to compel arbitration.
The insurer appealed the dismissals arguing that subsequent U.S. Supreme Court precedent required an abrogation of Stephens and enforcement of the arbitration clauses under the New York Convention. In reversing and remanding, the Second Circuit held that its reasoning in Stephens has been fatally undermined by the Court’s holding in Medellin v. Texas, 522 U.S. 491 (2008). The bottom line is that Stephens has been abrogated to the extent that it held that Article II, section 3 of the New York Convention is not self-executing.
The main issue the court addressed was articulated as follows:
Accordingly, the principal disagreement in this case is whether Article II
Section 3 of the New York Convention is “self-executing,” making it exempt from
reverse-preemption under the MF A, or whether it relies on an Act of Congress
for its effect, such that it can be reverse-preempted by Louisiana law.
The circuit court described how the Court in Medellin identified the hallmarks of a self-executing treaty provision within the larger treaty. Using those hallmarks, several courts, including the First and Ninth Circuits have held that Article II, Section 3 of the New York Convention is self-executing. Based on these cases, the Second Circuit reconsidered its analysis in Stephens and agreed with the First and Ninth Circuits. It found that the text of Article II, Section 3 of the New York Convention was self-executing under the Medellin factors (it provides a directive to domestic courts and that the US “shall” or “must” take a certain action).
Because the court held that under the Medellin test Article 11, Section 3 of the New York Convention is self-executing, it cannot be reverse preempted under the McCarran-Ferguson Act. This should mean that if a case falls under Article 11, Section 3 of the New York Convention, state anti-arbitration laws will not override the policy in favor of international commercial arbitration.