Without Contractual Privity, Claim Against Reinsurer Fails

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It happens ever so often. A policyholder will sue for coverage and will join its insurer’s reinsurer in the lawsuit. The majority rule in most US jurisdictions is that unless there is contractual privity between the policyholder and the reinsurer, a direct action is not allowed and the reinsurer will be dismissed from the case. While there are a few states that allow for direct actions against reinsurers, those typically are under special circumstances.

In most insurance arrangements, the policyholder is not aware of whatever reinsurance relationships have been entered into by its insurance company. In most reinsurance arrangements, the policyholder is not a party and the reinsurance contract typically has a provision that makes it clear that there are no third-party beneficiaries. There are, of course, exceptions to the rule, but not in a recent Florida case.

In City of Florida City, vs. Public Risk Management of Florida, Nos. 3D18-2175 & 3D19-0983, 2020 Fla. App. LEXIS 10391 (Fla. App. 3rd Dist. Jul. 22, 2020), a Florida appeals court affirmed summary judgment in favor of a reinsurer and dismissed the reinsurer from the lawsuit for lack of privity. The case involved an insurance coverage dispute over a failed construction venture. The city participated in an intergovernmental collective risk management program that provided errors and omissions coverage to municipalities. The program’s insurer denied the city coverage for an underlying investor claim arising out of a failed construction development. According to the insurer, the claim arose prior to the city’s participation in the program and, therefore, was not covered.

The program was a claims-made program, which required that the claim be noticed and brought within the term of the policy. The court found that the city knew about the investor claims well before it joined the program. As part of its decision, the court affirmed summary judgment for the program insurer as well.

The portion of the decision concerning reinsurance is very short because the court found that summary judgment in favor of the reinsurer was “soundly substantiated in both fact and law.” The court cited case law and statutory language under Florida’s Insurance Code to support the concept of contractual privity. See 624.610(9), Fla. Stat.

No person, other than the ceding insurer, has any rights against the reinsurer which are not specifically set forth in the contract of reinsurance or in a specific written, signed agreement between the reinsurer and the person.

The court affirmed summary judgment for the reinsurer based on the lack of contractual privity.

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