Conflating Insurance with Reinsurance

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To many people, insurance is complicated and reinsurance just makes matters worse. I get that, but it is pretty important that courts deciding insurance and reinsurance issues understand the difference. In a recent New York case, a state court conflated excess of loss insurance with reinsurance. Was the court right?

My friend, Daryn Rush from White and Williams discussed the case in great detail recently in his firm’s Reinsurance Alert so I am not going to repeat that analysis. The case is New York Bus Operators Compensation Trust v. American Home Assurance Co., No. 613776-20 (N.Y. Sup. Ct Suffolk. Cty, Mar. 3, 2021). The plaintiff is a self-insured workers’ compensation trust that purchased excess workers’ compensation insurance from the defendant. The case deals with the statute of limitations and when the cause of action accrued for breach of contract purposes.

Here’s what the court said about the excess policy being a reinsurance contract:

The plaintiff seeks to avoid the statute of limitations by characterizing the parties’ agreement as a contract of indemnity rather than a contract of insurance. Excess-of-loss insurance is a type of reinsurance (see generallyHaig, Commercial Litigation in NY State Courts§ 91.7 at 851-852 [5th ed 2020]) that has been used, as here, by self-insured employers to satisfy certain state workers-compensation insurance requirements (Staring & Hansell, Law of Reinsurance§ 2:9 [April 2020 Update]). Reinsurance is simply an insurance policy issued to an insurer (Continental Cas. Co. v Stronghold Ins. Co., Ltd.supra) or, in this case, a self-insurer. It is another form of insurance whereby an insurance company (the cedent) cedes to others part or all of certain insurance risks it has assumed (Id.; see alsoHaig § 91.4 at 839). A defining characteristic of reinsurance is that it is a contract of indemnity, rather than a contract of liability, meaning that reinsurers generally have no obligation to reimburse the cedent for covered losses or expenses until the cedent has first paid the loss or expense (Id.). In determining when a cause of action for breach of a reinsurance contract accrues, reinsurance agreements are treated like ordinary insurance contracts (Continental Cas. Co.supra). In the absence of any contractual provision to the contrary, the six-year limitations period set forth in CPLR 213 (2) begins to run at the moment the reinsurer declines to pay the cedent’s claim under the reinsurance contract (Id. at 145-146). Thus, even accepting the plaintiff’s characterization of the parties’ agreement as a contract of indemnity, it does not affect the outcome of the defendant’s motion.

In most circumstances, an excess insurance policy is not reinsurance. But the label of the policy is not controlling. How the policy operates is what matters. Excess of loss insurance, unless purchased by an insurance company, is not reinsurance. If the excess of loss insurer pays premium tax and does all the other things an insurer does it is not a reinsurer. But insurance purchased by a self-insured employer or group is a bit of a hybrid.

Interestingly, whether excess workers’ compensation insurance purchased by a self-insurer is insurance or reinsurance not crystal clear and has regulatory and insolvency implications according to another friend, Bob Hall (Excess of Loss Coverage for Self-Insurers: Is It Insurance or Reinsurance?). It appears that it is considered reinsurance in some states and insurance in others for regulatory purposes.

In New York, to confuse things even more, the relevant regulation, 12 N.Y.C.R.R. § 316.2, provides that a self-insured must certify to the Workers’ Compensation Board that it has purchased protection from catastrophic loss:

In addition to the deposit of securities and/or cash and/or the filing of a surety bond and/or irrevocable letters of credit required by the chair, the applicant shall provide security against catastrophic loss arising out of one accident, by filing with the chair the carrier’s certification of an excess, reinsurance contract issued to the self-insurer in form, content and amounts acceptable to the chair; such contract must be issued by an insurance carrier authorized by the Superintendent of Insurance to write said excess contract in New York State, and must contain specific coverage for workers’ compensation.

Note, the sentence says “excess, reinsurance contract issued to the self-insurer.” When you look at the form a self-insurer has to file with the Board the word “reinsurance” does not appear. It’s called a certificate of excess insurance.

So, in the self-insured workers’ compensation context, it appears that whether an excess workers’ compensation policy is insurance or reinsurance is not as clear as one might think. It would be great to hear from the workers’ compensation experts on this one.

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