Many reinsurance arrangements require the posting of collateral. The failure to post collateral is often grounds for a breach of contract claim. In a recent decision, a New York federal court granted summary judgment to the cedent on its claim of breach of contract by the reinsurer when the reinsurer failed to provide the required collateral.
In AmTrust North America, Inc. v. Signify Insurance Ltd., No. 18 Civ. 3779 (ER), 2020 U.S. Dist. LEXIS 129476 (S.D.N.Y. Jul. 22, 2020), the cedent sued the reinsurer for breach of contract for failing to post required collateral. The deal was a form of captive fronting arrangement for workers’ compensation policies. The cedent wrote certain workers’ compensation policies and the reinsurer, a captive of the outsourced human resources company, provided the reinsurance of the policies written by the cedent to the human resources company’s clients. The reinsurer brought several counterclaims, including that the cedent had breached the operative program agreement. We previously discussed an earlier decision in this case in our prior firm’s September 2019 Reinsurance Newsletter, in which the court denied the reinsurer’s motion to dismiss the complaint and granted the cedent’ motion to dismiss several of the reinsurer’s counterclaims.
After the earlier decision, the reinsurer still had not posted the required collateral. The cedent moved for summary judgment before discovery on its breach of contract claim and to dismiss the remaining counterclaims. In the interim, the reinsurer indicated that it was insolvent.
In granting the cedent’s motion, the court noted that the reinsurer did not contest most of the cedent’s arguments and merely contested the dismissal of its sixth counterclaim. While the reinsurer objected to summary judgment, the court found that it failed to indicate what discovery it would need to raise genuine issues of material fact to any of the cedent’s claims. The court considered the failure of the cedent to contest any of the cedent’s claims to be a waiver of those issues. Moreover, the court found the cedent’s arguments meritorious.
The court held that the cedent clearly established a breach of contract because in its plain terms, the reinsurance agreement required the reinsurer to maintain a certain level of collateral. The court also rejected the reinsurer’s sixth counterclaim, which was for breach of a related program agreement. The court found that the reinsurer did not point to any provision of the program agreement that the cedent breached.
The failure to post collateral, held the court, was an indisputable material breach of the program agreement and the reinsurance agreement. The court rejected the reinsurer’s interpretation of the collateral provisions as inconsistent with the obligations under the program agreement. Having found no material issues of fact, the court granted the cedent’s motion and granted summary judgment on the breach of contract claim for failure to post collateral.