A Brief Review of Reinsurance Trends in 2021

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The big headline from 2021 is that the Second Circuit struck the final death blow to Bellefonte. While long expected this decision ends a near forty-year saga of whether the limit of liability in a facultative certificate caps a reinsurer’s indemnity and expense obligations. Courts in 2021 also addressed numerous other reinsurance matters, including those about arbitration, arbitrability, and compelling arbitration in the face of the McCarran-Ferguson Act. 

2021 also brought us more cases concerning disclosure of reinsurance information and whether tortious interference claims belong in reinsurance. Courts also made decisions concerning runoff providers and reinsurance trustees.


Most reinsurance arbitrations fall under the Federal Arbitration Act (“FAA”).  In the reinsurance context, questions of arbitrability and the powers of the arbitrators arise often.  In 2021, courts continued to exercise their authority to compel arbitration and leave many questions of arbitrability to the arbitrators. 

Arbitrability and Motions to Compel Arbitration

Who decides whether an arbitration should go forward is often a controversial issue. Is it the court or is it the arbitration panel? In Alliance Health and Life Insurance Co. v. American National Insurance Co., No. 20-cv-12479 (E.D. Mich. Aug. 31, 2021), the court determined that it was the arbitrators that had to decide whether a limitations provision in a reinsurance contract precluded arbitration.

The case involved a Medical Excess Reinsurance Agreement with a mandatory arbitration clause providing that no arbitration could be commenced more than three years after the effective date of the reinsurance contract. In this case, the arbitration was commenced after three years and the cedent claimed that because of that the arbitration provision no longer applied.

The court dismissed the complaint in part because the cedent did not dispute that it consented to arbitration when it signed the reinsurance contract, which bound the cedent to the arbitration provision. Because time limitations are a matter of procedure under Supreme Court precedent, and because there was no provision in the reinsurance agreement that required the court to determine questions of timeliness, the presumption in favor of arbitration stood and the limitations issue was for the arbitrators to decide. This case continues the trend of deference given by the courts to arbitration, especially where the arbitration provision is broad.

Two cases decided in 2021 brought the judicial trend of granting motions to compel arbitration together with the trend in several federal circuits holding that the McCarran-Ferguson Act does not reverse preempt the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).

In Green Enterprises, LLC. v. Dual Corporate Risks Limited, Civ. No. 20-1243(JAG) (D. PR. Jun. 15, 2021), the insurers moved to compel arbitration based on the New York Convention. The policyholder opposed the motion and sought to preclude arbitration based on the principle of reverse preemption under the McCarran-Ferguson Act and local insurance law precluding arbitration of insurance disputes.

The court granted the insurers’ motion to compel arbitration, holding that the McCarran-Ferguson Act did not enable Puerto Rico’s Insurance Code to reverse-preempt a treaty like the Convention, or the FAA itself, and that the arbitration provision invoked by the insurers was valid and applicable. This decision goes further than other decisions on this side of the circuit split by addressing preemption of the FAA.

In the second case, the Ninth Circuit joined several other circuits in holding that Article II, Section 3 of the New York Convention is self-executing and, therefore, arbitration can be compelled. In CLMS Management Services Limited Partnership v. Amwins Brokerage of Georgia, LLC, No. 20-35428 (9th Cir. Aug. 12, 2021), a policyholder sought to preclude arbitration of a claims dispute arguing that state insurance law (Washington) barred arbitration of disputes under insurance contracts. The non-US insurer sought to compel arbitration under the New York Convention. The district court granted the motion to compel arbitration.

In affirming the order compelling arbitration, the circuit court addressed the circuit split on this issue and, in a concise and well-reasoned decision, explained why McCarran-Ferguson did not apply and how the New York Convention, Art. II, Sec. 3, was self-executing. In summary, while the FAA’s Chapter 2 implemented the New York Convention—which may be reverse preempted by application of McCarran-Ferguson where there is an insurance law provision that bars arbitration of insurance disputes because it is an act of Congress—Article II, Section 3 of the New York Convention is self-executing and, as a Treaty and not an act of Congress, is not reverse preempted by McCarran-Ferguson and takes precedence over state law under the Constitution’s Supremacy Clause. Bottom line, the insurance dispute must be arbitrated.

Challenge to Arbitrator

Challenging the qualifications of an arbitrator is difficult. Most courts reject pre-arbitration challenges and require the objecting party to wait for a final award to raise a challenge. But sometimes the stars align, and the challenge is allowed. In 2021, a California federal court accepted the challenge on cross-motions to compel arbitration and disqualified a party-appointed arbitrator for not being disinterested.

In Public Risk Innovations, Solutions, and Management v. AmTrust Financial Services, Inc., No. 21-cv-035730-EMC (N.D. Calif. July 12, 2021), an objection was made to a party-appointed arbitrator as unqualified because of not being a current or former official of an insurance or reinsurance company and because of he was not disinterested. Both parties agreed that the underlying dispute was arbitrable and both parties agreed that the court should decide this dispute over the arbitrator’s qualifications.

The court rejected the challenge based on whether the arbitrator was qualified as a current or former official of an insurance or reinsurance company. The arbitrator was general counsel to several joint power authorities and self-insured joint power authorities and risk pools. The court held that in the context of the arbitration agreement the joint power authority could be seen as an insurance company, especially as a self-insured pool that essentially acts like an insurer.

Nevertheless, the court held that the arbitrator was not disinterested because he currently worked for entities that were members of the self-insured pool and could feel pressure to favor the pool’s position. Accordingly, the court found that the arbitrator was not qualified under the arbitration agreement.

Powers of the Arbitration Panel and Arbitration Awards

The great deference given to arbitrators and their awards is unquestionable in the US. Under the FAA, there is no appeal of an arbitral award. Parties can only seek to modify, vacate or confirm an arbitration award. The court’s scope of review of an arbitration award is narrow. Where, as in reinsurance arbitrations, arbitrators are given even greater leeway to decide cases—especially where there is an honorable engagement clause—the courts’ scope of review of an arbitration award is restricted even further.

In Continental Casualty Co. v. Certain Underwriters at Lloyd’s of London, No. 20-2892 (7th Cir. Aug. 23, 2021), after an arbitration hearing and the issuance of a final arbitration award, an interim arbitration award and a post final award order, the cedent sought to confirm the final award, but to vacate the last two orders. The panel, in its final award and the subsequent orders, decided not only the specific billing methodology question that reinsurers originally had presented, but also what the consequences of its ruling were for the three insured companies it named. And the panel clarified the question that remained after the final order about the applicability of its ruling to future billings relating to asbestos products losses for those three companies. The district court confirmed everything and the cedent appealed.

In affirming, the Seventh Circuit reiterated the limited scope of review given to arbitration awards by the courts. The court explained that an arbitral award must draw its essence from the contract. Accordingly, the scope of the agreement to arbitrate—whether the arbitrators were given a broad or narrow mandate—is critical to the narrow scope of review of an arbitration award. The court found several broadening factors that allowed the arbitration panel great discretion in interpreting the contract and devising a remedy, including the power to resolve the case on general principles, not just legal entitlements. The court held that the arbitration panel acted within the authority conferred by the contract. Because the court concluded that the arbitrators did not stray beyond the boundaries of their authority, the court affirmed the district court’s order confirming of all three awards and orders.

The trend toward upholding arbitration awards was also demonstrated in Adventure Motorsports Reinsurance , Ltd. v. Interstate National Dealer Services, Nos. S21G0008, S21G0015 (Ga. Sup. Ct., Dec. 14, 2021), where the Georgia Supreme Court reversed the court of appeals finding of manifest disregard of the law and remanded the matter.

After an arbitration award was issued, cross-motions were made to vacate and confirm. The trial court confirmed the award and an appeal ensued where the court of appeals vacated the award based on manifest disregard of the law by the arbitrator who the court said explicitly rejected the contract language. On appeal to the Georgia Supreme Court, the court reversed and remanded.

In reversing the court of appeals, the supreme court concluded that the court of appeals erred in reversing the confirmation of the award on the basis that the arbitrator manifestly disregarded the law in rendering the award. The court analyzed the law on manifest disregard and commented that an arbitrator who incorrectly interprets the law has not manifestly disregarded it. The court found that the arbitrator never expressed, during the hearing or in the arbitration award, that the correct law should be ignored rather than followed. Ultimately, the court held that the arbitration award drew its essence from the contracts. The court, however, remanded the decision back to the court of appeals for resolution of the argument that the arbitrator overstepped his authority in making the award and reconsideration of the trial court’s failure to enforce a delayed-payment penalty provided in the arbitration award.

The key point here is that even in state court under state arbitration law, manifest disregard of the law is a very difficult standard to meet when seeking to vacate an arbitration award. Arbitrators have wide discretion and just like in the federal courts, if the award draws its essence from the terms of the disputed contract, the award likely will be confirmed.

When parties participate in an arbitration and obtain a final award, usually that is the end of the dispute. But sometimes there are collateral agreements involved and the losing party may try to bring litigation based on those collateral agreements to obtain a different form of relief.

In White Rock Insurance Co. PCC Limited v. Lloyd’s Syndicate 4242, No. 652867/2020 (N.Y. Sup. Ct., N.Y. Cty May 18, 2021), a protected cell reinsurer sued its cedent seeking a declaration that certain provisions of a trust agreement extinguished its liability to the cedent. The cedent moved to dismiss the litigation based on a prior arbitration proceeding between the parties and the final arbitration award issued by the arbitration panel.

In granting the motion to dismiss and confirming the final arbitration award, the court held that the prior arbitration and the final arbitration award precluded this litigation. The court noted that the arbitration panel’s finding, that the collateral release did not change the reinsurer’s obligation to pay losses as they became due under the reinsurance contract despite the shortfall in the collateral in the trust fund, went to the heart of the issue in this litigation. The court pointed out that the reinsurer specifically argued that the trust fund provisions relieved it of its obligations to the cedent and asked the arbitration panel to rule on the trust fund provisions even though the trust fund did not have an arbitration clause. The court held that the arbitration panel clearly considered the trust fund issues raised in the litigation in reaching its determination.


For decades, reinsurers and the courts relied on the Second Circuit’s holdings in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993), to cap a reinsurer’s liability under certificates of facultative reinsurance for indemnity and expenses. This reliance was sharply criticized by cedents and others in the industry. In 2021, the Second Circuit made it clear that its decisions in Bellefonte and Unigard are no longer good law.

In Global Reinsurance Corp. of America v. Century Indemnity Co., No. 20-1476 (2d Cir. Dec. 28, 2021), the Second Circuit addressed an appeal from a district court judgment denying the reinsurer’s request for a declaratory judgment that the stated limits in 10 facultative certificates capped the reinsurer’s liability for both indemnity and expenses. In affirming, the court held that the certificates’ policy limits were not inclusive of defense costs and announced that its earlier decisions on this subject were no longer good law.

The court, in affirming and holding that the reinsurer’s obligation to pay its proportionate share of the cedent’s defense costs was not capped by the certificates’ liability limits, concluded as follows:

Because the certificates do not specifically provide that the terms of [the reinsurer’s] reinsurance differ from those of the [cedent’s] policies with respect to the treatment of defense costs, the follow-form clause requires that [the reinsurer’s] payments toward [the cedent’s] defense costs be made in addition to the certificates’ limits. This conclusion follows not only from the unambiguous language of the certificates but also from evidence of custom and usage concerning the central importance of concurrency to the reinsurance market when the certificates were issued.

Notably, concerning Bellefonte and Unigard, the court explained that the New York Court of Appeals’ holding on the Second Circuit’s certified question:

. . . conflicts with our decisions in Bellefonte and Unigard, in which we held that the liability limits contained in the certificates at issue “necessarily cap[ped] all obligations owed by [the] reinsurer[s], such as defense costs, without regard for the specific language employed therein.” . . . Because [the New York Court of Appeals decision] exposed a fundamental conflict between these precedents and “New York law as determined by the New York Court of Appeals,” which we are “bound to apply,” . . . , we are “require[d] to conclude” that Bellefonte and Unigard are “no longer good law.” (citations omitted).

The bottom line: Bellefonte now resides in the scrapheap of wrongly-decided cases.

Even before Global Reinsurance Corp. of America was decided, an earlier 2021 decision by the Second Circuit foreshadowed the renewed focus on contract wording. In Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., Nos. 19-1241; 19-4335 (2d Cir. Jul. 29, 2021), the Second Circuit was faced with two appeals of two district court judgments that went in opposite directions. The cases primarily concerned whether the reinsurers must reimburse the cedent for defense costs in addition to limits of the cedent’s umbrella policies. In one case, the court, after a bench trial, held that the reinsurer did not have to reimburse defense costs in addition to the limits. In the other case, after a jury trial, the court held that the cedent was entitled to reimbursement for defense costs in addition to the limits. Obviously, the opposite results could not stand.

The circuit court affirmed the bench trial judgment (no reimbursement on a costs-in-addition basis – victory to the reinsurer) and reversed and remanded, in part, the jury trial judgment. In making its decision, the court addressed whether an amendment to the umbrella policy changed the policy from cost-inclusive to cost-in-addition. The court found that the amendment only affected the drop-down coverage, not the excess coverage, and changed the how expenses would be reimbursed only for the drop-down coverage. Accordingly, the cedent was not entitled to reimbursement for expenses in addition to the limit.

Nevertheless, the cedent argued that the follow-the-settlements doctrine required the reinsurer to pay the settlement anyway. The court rejected this argument.  Because the underlying settlement treated the umbrella policy as cost-inclusive, it contradicted the cedent’s position that the reinsurer must pay on a cost-in-addition basis.

Additionally, the court found that the follow-form facultative certificates linked the reinsurer’s liability to that of the cedent and under the umbrella policies, expenses were cost-inclusive. As the court noted, a follow-the-settlements clause does not alter the terms or override the language of the reinsurance contracts. Accordingly, the court held that the underlying settlement agreement did not independently require the reinsurers to pay defense costs in addition to the limits.

Discovery and Sealing

              Production of Reinsurance Information

Reinsurance information is now regularly requested by plaintiff’s lawyers in underlying coverage disputes.  Courts tend to allow this discovery, although it is sometimes limited to just the reinsurance contracts. 

In U.S. Tobacco Cooperative, Inc. v. Certain Underwriters at Lloyd’s, No. 19-cv-430-BO (E.D.N.C. Apr. 9, 2021), the court addressed the policyholder’s second motion to compel discovery against the insurers. The court ordered broad production of reinsurance materials based on the automatic disclosures required under Rule 26(a)(1)(A), which required the insurers to identify and produce any relevant reinsurance agreements if the reinsurers may be liable for paying part of a judgment against the insurers.

The court also addressed the insurers’ claim that the reinsurance materials were protected by the attorney-client or attorney work-product privileges. The court analyzed the parameters of the privileges and instructed the insurers to only withhold documents if they had a good faith belief that the communications related to the provision of legal services.

On the production of reinsurance materials, the court noted that the cases conflict on the issue. The court rejected the insurers’ argument that the policyholders had not shown the reinsurance information to be relevant because the burden is on the insurers to show a lack of relevance. The court found that the insurers presented no evidence showing that the reinsurance documents should be immune from discovery. No affidavits or other evidence were presented, just unsworn statements in the briefs.

Additionally, the court found that the insurers had waived the privileges because there had been both deposition testimony and some document production of reinsurance information. Accordingly, the court ordered production of the requested reinsurance documents.

There are many approaches used to resist production of reinsurance information. In 2021, one case involved the insurer invoked the “insurer-insured privilege.” In Gibson v. Chubb National Insurance Co., No. 20-CV-1069 (N.D. Ill. Sep. 27, 2021), a coverage dispute arose concerning a fire loss. During the litigation, the policyholder filed a motion to compel production of documents, including, among other things, reinsurance information. The insurer claimed insurer-insured privilege.

In granting the motion to compel, the court found that the insurer was not entitled to withhold communications with its reinsurer about the policyholder’s claim. The insurer attempted to bring the communications within an offshoot of the attorney-client privilege that related to the duty to defend the underlying claim. Illinois courts have held that communications between an insured and an insurer where the insurer has a duty to defend is privileged and that has been extended to agents of the insurer. The court rejected the argument that communications between the insurer and the reinsurer fell within the privilege. Here, the reinsurer had no duty to defend, and the court directed the insurer to produce the communications.

What happens to reinsurance-related evidence when it comes to trial? In 2021, a court answered that question. In Fluor Corp. v. Zurich American Insurance Co., No. 4:16CV00429 ERW (E.D. Miss. Jul. 16, 2021), the parties made a variety of motions in limine in advance of trial in an insurance coverage dispute. One of the insurer’s motion was to exclude evidence of reinsurance, including communications with its reinsurers concerning the underlying claims. The policyholder argued that many trial exhibits mentioned reinsurance and that it was not practical or justified to redact all those exhibits.

The court granted the motion based on Rule 411 of the Federal Rules of Evidence and cited a series of 8th Circuit cases on the prejudicial nature of allowing evidence of insurance or reinsurance. The court held that the evidence of reinsurance posed a high risk of prejudice to the insurer.


Reinsurance arbitrations are typically confidential and generally proceed with a confidentiality agreement in place protecting all arbitration information, including the final award, from disclosure. This contrasts with legal proceedings, including proceedings collateral to arbitrations, where generally the public’s right to judicial documents outweighs the parties’ privacy. In recent years, when parties to reinsurance arbitrations have gone into court to confirm, enforce, modify or vacate arbitration awards, courts have been reluctant to keep the final awards under seal. In fact, some parties have used this trend as a litigation strategy to “unseal” confidential final arbitration awards by going to court to confirm an award where there was no indication that the losing party would not comply with the award.

Bucking that trend in 2021, a New York federal court allowed the final arbitration award to remain sealed. In West Coast Life Insurance Co. v. Swiss Re Life & Health America, Inc., No. 21 Civ. 5317 (VB) (S.D.N.Y. Jun. 28, 2021), a final arbitration award was issued and both parties filed the award with the federal court under seal and moved to confirm the award.

Of course, the court confirmed the award as there was no objection and both parties agreed to confirmation and both parties requested that the final award be sealed in the first instance and remain sealed. The court noted that generally arbitration awards filed with a petition to confirm that award are considered “judicial documents that directly affect [] the Court’s adjudication of that petition,” and therefore sealing of the award requires that the movant demonstrate that “sealing is necessary to preserve higher values.” (Citation omitted).

Here, however, the court decided otherwise. The court’s rationale for keeping the award sealed is set forth below:

[B]ecause the parties jointly request that the Court confirm the final award, the final award itself does not “directly affect the Court’s adjudication of that petition.” Thus, the final award is not a “judicial document” subject to a presumption of access. Moreover, the Court is persuaded by the parties’ assertion that the final award should be sealed because it is subject to a confidentially agreement and contains confidential, sensitive, and proprietary information that could potentially prejudice the outcomes of related legal disputes not before the Court as well as prejudice the parties in future competitive business negotiations.

Obviously, those who wish to keep reinsurance arbitration awards confidential are overjoyed with this decision given the many other cases that have gone the other way. This outcome, however, likely will not hold up where there is a dispute about the award or where one party is opposing confirmation.

Direct Right of Action

Policyholders typically cannot sue reinsurers directly because of a lack of contractual privity. While there are exceptions in the law, those exceptions are few. But sometimes a reinsurance deal gets structured in such a way that the policyholder may be able to bring a direct action.

In Casa Besilu LLC v. Federal Insurance Co., No. 20-24776-Civ-Scola (S.D. Fla. Apr. 23, 2021), a policyholder claimed that to obtain property insurance for its property in the Bahamas it approached the reinsurers for assistance. The complaint alleged that the reinsurers engaged local brokers to obtain the insurance from a Bahamian insurer and the reinsurers provided the reinsurance. The complaint further alleged that the policyholder never dealt with the local brokers and that they filled out an insurance application given to the reinsurers requesting comprehensive liability and property insurance at specific limits, including flood insurance.

According to the complaint, flood insurance was never obtained and when a hurricane caused damage to the property, the Bahamian insurer refused to pay for any of the damages caused by storm surge. There are more facts alleged, including that the reinsurers interfered in the process and caused the Bahamian insurer to calculate water damage separate from wind damage.

Naturally, the reinsurers moved to dismiss the complaint, which contained claims of tortious interference, breach of fiduciary duty and other claims. They argued, among other things, that there was no privity of contract and, therefore, not direct right of action. The policyholder countered that they were not suing under the reinsurance contract, but for the reinsurers’ tortious interference with the policyholder’s direct insurance contract.

The court denied the motion to dismiss. Basically, the court found that the complaint had sufficient allegations to survive the motion to dismiss and the court would not convert the motion to one for summary judgment (both sides submitted evidentiary affidavits that the court would not consider).

This is an unusual case because of the relationships between a policyholder and an insurance group that typically writes direct insurance and the insurance group’s alleged involvement with placing insurance in the Bahamas and then reinsuring that insurance. Whether the policyholder will be successful in the end will require a much more detailed inquiry into the facts.

A direct right of action may arise if there is a cut-through clause in the reinsurance contract. Cut-through clauses, however, must be express. 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 and the appellate court affirmed 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 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.

Tort of Bad Faith

Can tort claims be brought against reinsurers for bad faith? In Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20cv300-MHT, 2021 WL 981495 (M.D. Al. Mar. 16, 2021), a federal court had to decide whether, under Alabama law, the tort of bad faith is recognized in the reinsurance context. In dismissing the bad faith claims, the court performed a detailed analysis of Alabama law and articulated how narrowly Alabama interpreted the tort of bad faith. Essentially, Alabama had narrowed the tort down to the consumer-based insurance relationship and refused to apply the tort to general commercial contracts.

The court distinguished the difference in motivation and sophistication between a reinsurance transaction and a standard insurance transaction in concluding that the Alabama Supreme Court would not extend the tort of bad faith to a reinsurance dispute.

In a later decision, Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 20 cv 300-MHT (M.D. Ala. Apr. 12, 2021), the cedent moved the federal court to certify to the Alabama Supreme Court the question of whether Alabama recognizes the tort of bad faith in the reinsurance context. The court rejected the motion holding that certification would be neither necessary nor appropriate.

Runoff Managers

The proliferation of runoff providers for books of reinsurance has generated disputes involving runoff managers. For example, in Stonegate Insurance Co. v. Fletcher Reinsurance Co., No. 21 C 3523 (N.D. Ill. Dec. 6, 2021), the cedent sued a reinsurer that had been acquired by a runoff entity and two affiliated service providers for breach of contract, tortious interference with contract, and bad faith refusal to pay claims over reinsurance agreements between the cedent and the reinsurer’s predecessor. 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. 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.

In another case, a court addressed claims brought by cedents against the reinsurer’s runoff manager for intentional interference with contractual relations and inducing breach of contract when the claims stopped being paid. In California Capital Insurance Co. v. Enstar Holdings US LLC, No. 20-cv-7806-ODW (C.D. Calif. Apr. 14, 2021), a group of cedents brought suit against the runoff manager of its reinsurer for intentional interference with contractual relations and inducing breach of contract. The cedents alleged that after the reinsurer’s business was transferred to the runoff entity, the claims process changed, and the manager directed the reinsurer to breach its reinsurance obligations. Additionally, the cedents alleged that the reinsurer stopped paying certain losses and demanded the return of reinsurance proceeds already paid under certain categories of  taxi and limousine livery, trucking, and habitability claims.

The runoff manager moved to dismiss the complaint. The court granted the unopposed portion of the motion dismissing the case against the runoff manager’s holding company but denied the motion as to the rest of the runoff manager’s entities. The court found that the complaint provided sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively, even though the cedents did not allege exactly how the runoff manager directed the reinsurer to breach the treaty. The court refused to grant the motion to dismiss because the complaint was sufficient under pleading standards to withstand the motion.

Reinsurance Trustees

Reinsurance agreements with non-US off-shore reinsurers usually involve a reinsurance trust with a bank acting as trustee. These trust agreements typically absolve the trustee from nearly all liability because of their ministerial role in the reinsurance transaction. This is very common in off-shore life, annuity and long-term care reinsurance agreements.

In the last several years, however, trustees have come under scrutiny because some off-shore reinsurers were not quite on the up-and-up and the assets placed in the trust accounts and managed by the reinsurers’ affiliated investment managers have been substandard. This, of course, has caused the reinsurance arrangement to collapse, regulatory issues and often the total loss of the assets meant to secure the cedent’s losses. Because these reinsurers typically do not have assets on shore, some of their cedents have gone after the trustees seeking damages.

In Bankers Conseco Life Insurance Co. v. Wilmington Trust, National Association, No. 13185 (N.Y. App. Div. 1st Dep’t Apr. 20, 2021), a long-term care reinsurance deal resulted in serious problems for the cedent when the regulator declared that many of the assets in the trust account were not eligible assets. Not only were the assets not eligible, but they were non-negotiable. The cedent was forced to recapture the business and terminate the reinsurance agreements while taking a substantial loss. The reinsurer, which was not involved in this lawsuit, was the alter ego of a private equity fund that devised a scheme to defraud insurance companies.

While the trust agreement limited the trustee’s liability and responsibility—it was not responsible to determine whether the assets were eligible under state law to be placed into a reinsurance trust account—the agreement did have certain provisions that the court found important:

However, the agreements did provide that [the trustee] was not to accept into the trusts any “non-negotiable” assets, meaning assets that were not capable of being liquidated at a moment’s notice without the need to clear any administrative hurdles. Further, the agreements provided that [the trustee] would “only be liable for its own negligence, willful misconduct, or lack of good faith in connection with its performance” and that “in no event shall [the trustee] be liable under or in connection with this . . . Trust Agreement for indirect, special, incidental, punitive or consequential losses or damages of any kind whatsoever.”

In reversing the motion court and reinstating the causes of action for breach of contract and breach of fiduciary duty against the trustee, the court agreed with the cedent that the breach of contract claim was prematurely dismissed prior to factual and expert discovery. On the breach of fiduciary duty claim, the court held that the trustee’s designation raised the question of whether the trustee owed a fiduciary duty to the cedent as beneficiaries of the trust separate from the trustee’s contractual duties under the trust agreement.

Cases like these are important to financial institutions that serve as reinsurance trustees but are more important lessons to cedents who are attracted to off-shore deals that may be too good to be true. Keeping a watchful eye on the character and quality of the assets in any trust agreement or funds withheld account where the reinsurer is managing the investments through a related affiliate is crucial to avoiding what happened to the ceding company in this (and related) cases.

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