Runoff Reinsurance Disputes and Service Providers

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It has become commonplace for reinsurance counterparties to change over time. This is especially true with runoff books of business or books of business that have been transferred to runoff entities through loss portfolio transfers or other mechanisms. It is also commonplace that when a book of business is acquired by a runoff organization, the assuming entity will enter into one or more service agreements with affiliated companies to manage the assumed claims and financial transactions.

When a new organization is managing an assumed reinsurance portfolio it often takes a fresh look that the reinsurance business it acquired. This sometimes results in frustration for the ceding company when claims are not being paid the same way they were prior to the acquisition. Naturally, disputes arise and sometimes the affiliated service providers are brought into the dispute. In a recent case in Illinois a runoff dispute landed in court and motions to compel arbitration and dismiss the complaint against the service providers were made.

In Stonegate Insurance Co. v. Fletcher Reinsurance Co., No. 21 C 3523 (N.D. Ill. Dec. 6, 2021), the cedent sued the reinsurer and two affiliated service providers for breach of contract, tortious interference with with contract, and bad faith refusal to pay claims over reinsurance agreements between the cedent and the reinsurer’s predecessor. The reinsurer had been acquired by a well-known runoff organization. The reinsurer defendant moved to compel arbitration under the reinsurance agreements and the service provider defendants moved to dismiss the complaint for lack of personal jurisdiction and failure to state a claim for relief.

The district court granted the reinsurer’s motion to compel arbitration, which the cedent did not oppose. But the parties disputed whether that part of the case should be dismissed or stayed. Ultimately, the court granted the motion to dismiss, holding that because all issues between the cedent and reinsurer would be decided in the arbitration, staying the action was a waste of judicial resources.

On the service providers’ motion to dismiss, the court rejected the personal jurisdiction argument, but ultimately found that the complaint did not state a claim against the service providers. The court found that the service providers were agents of the reinsurer and, therefore, they were conditionally privileged against a claim that they intentionally interfered in the contractual relationship of their principal. The court held that the allegations in the complaint did not rise to the level of malicious or unjustified conduct, which would have negated the conditional privilege.

Though [the cedent] alleges that Defendants acted in their own financial interest, it pleads no facts as to how Defendants’ financial interests are “prejudicial or injurious to” [the reinsurer’s] in any way. As such, [the cedent’s] allegations do not permit a reasonable inference that Defendants acted solely for their own gain, contrary to [the reinsurer’s] interests, such that the conditional agency privilege should not apply.

The court also dismissed the statutory bad faith claim against the service providers, holding that the statute did not apply in the reinsurance context.

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