No Tort Liability in Reinsurance Contract Dispute Under California Law

A typical reinsurance dispute is essentially a breach of contract dispute. A reinsurance agreement is a contract between two insurance companies. Tort liability rarely comes into play. Under California law, however, tort liability has been extended in certain disputes between insurers and policyholders. Recently, a California federal court had to address whether tort liability for breach of the implied covenant of good faith and fair dealing was a valid cause of action under California law in a reinsurance dispute.

In California Capital Insurance Co. v. Maiden Reinsurance North America, Inc., No. 2:20-cv-01264-ODW (C.D. Ca. Jul. 16, 2020), the cedent, apparently frustrated with the reinsurer’s claims responses after the original reinsurer was taken over by a runoff company, brought an action for breach of an excess-of-loss reinsurance contract. The cedent’s second cause of action was for breach of the implied covenant of good faith and fair dealing. The allegations supporting the second cause of action sounded in tort (e.g., allegedly wrongfully and unreasonably delaying payment of valid claims). The reinsurer moved to dismiss the second cause of action.

In granting the reinsurer’s motion to dismiss the second cause of action, the court distinguished the exception under California law that allows policyholders to seek tort damages in addition to breach of contract against their insurers. The cedent argued that because a reinsurance contract is an insurance contract, the same exception should apply. The court noted that this was an issue of first impression and that there was no California appellate authority addressing whether a reinsurer could be liable in tort to a cedent.

The court found that the cedent failed to consider the significant differences between the insurance relationship and the reinsurance relationship. The court pointed out that the California Supreme Court looks to the relationships between the parties before allowing for tort damages in the insurance context. For example, the court noted that in the surety bond context, the California Supreme Court held that tort damage could not be recovered.

The court followed the California Supreme Court’s lead, examined where the court extended liability and found that none of the social policy issues found in a typical insurance relationship existed in the reinsurance relationship. For example, there was no unequal bargaining power and not the same public interest. The court held that “the policy reasons the California Supreme Court
considered when extending tort remedies to a breach of the implied covenant in insurance cases are absent from the reinsurer-reinsured relationship.”

Accordingly, the court granted the reinsurer’s motion to dismiss the second cause of action to the extent the cedent sought tort remedies. The cause of action premised on contractual damages remained.