Insured’s Claims Against Reinsurers Dismissed Where Reinsurance Contract Had No Cut-Through Clause

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Whether an underlying insured has a direct right of action against reinsurers often depends on whether there is a cut-through clause in the reinsurance contract. A cut-through clause allows the underlying insured to cut through directly to the reinsurers if the policy issuing company becomes insolvent. Check out my colleague Robert M. Hall’s article, Are Cut-Through Clauses Enforceable?, in the ARIAS U.S. Quarterly, Second Quarter, 2021 and my Expert Commentary on cut-through clauses.

In a recent appellate decision in New York, the court affirmed the dismissal of a complaint by a policyholder against its reinsurers because there was no cut-through clause.

In Wells Fargo Bank, N.A. v. Lloyd’s Syndicate AGM 2488, No. 13956 (N.Y. App. Div. 1st Dep’t Jun. 1, 2021), the motion court granted facultative reinsurers’ motion to dismiss the policyholder’s claims against them. The case involved a bank’s captive reinsurer and unaffiliated retrocessionaires. The appellate division affirmed in a very short decision, finding that “[n]one of the reinsurance contracts at issue, including the January 4, 2010 Underwriters Reinsurance Policy (URP), issued by Lloyds contain a “cut through” provision allowing the original insured [ . . . ] to bring suit directly against the reinsurers.” The court pointed out that the operative reinsurance contract merely identified the policyholder and the cedent. The court also ruled that the policyholder’s interpretation of the reinsurance contract would lead to an absurd result and was contrary to the parties’ reasonable expectations.

As an aside, the motion court judge, Justice Barry Ostrager, practiced insurance and reinsurance for over 30-years and the transcript of the underlying motion argument is interesting as counsel for the policyholder tried to convince the judge that there was more to the reinsurance contracts then what the words said.