Without a Contractual Relationship, Claims Against Reinsurers Fail

To sustain a claim against reinsurers there has to be a contractual relationship between the party making the claim and the reinsurers. That is the prevailing rule in all jurisdictions, subject to rare exceptions. Nevertheless, policyholders, when left without a recovery from their insurer, will try to make out a claim directly against their insurer’s reinsurers. Typically, this effort meets with little success as we described in a blog post back in 2020.

Earlier this year, in a complicated credit insurance/reinsurance transaction involving a special purpose vehicle, a policyholder left without an insurance recovery tried again to recover its loss from its insurer’s reinsurers. The result was the same.

In Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC LLC, 31 F.4th 800 (D.C. Cir. 2022), a finance company obtained credit insurance through a special purpose vehicle, which in turn obtained reinsurance from several reinsurers. The finance company issued a loan and ultimately the borrower defaulted. The finance company sought recovery under the special purpose vehicle and the parties arbitrated the claim. The finance company prevailed in arbitration but the special purpose vehicle did not have the assets to pay the award and the reinsurers all disclaimed under the terms of the reinsurance agreements.

The finance company sued the special purpose vehicle, the reinsurers and the brokers in federal court seeking, among other things, a direct recovery from the reinsurers. The district court dismissed the finance company’s breach of contract and declaratory judgment claims and ultimately granted summary judgment to the reinsurers (and the brokers).

On appeal, the circuit court affirmed the district court’s dismissal of the finance company’s breach of contract and declaratory judgment claims because, as the district court concluded, the finance company failed to plead facts sufficient to show a contractual relationship with the reinsurers. As the court found, the reinsurance agreements created no contractual relationship with the finance company. Instead, the agreements were “solely between [ART] and the Reinsurer[s]” and “nothing contained in th[e] Agreement[s] shall create any obligations or establish any rights against the Reinsurer[s] in favor of any person or entity not a party hereto.” 

The court rejected the finance company’s attempt to analogize these facts with those in cases where a direct relationship was alleged. The court also affirmed the district court’s grant of summary judgment on the remaining allegations, finding that there was no evidence to support the finding of an implied contract. In fact, the only evidence of consideration being exchanged was between the finance company and the special purpose vehicle and the separate exchange between the special purpose vehicle and the reinsurers. The lack of evidentiary support for any of its claims doomed the finance company’s appeal.

Courts continue to insist on privity of contract where direct actions are brought by policyholders against reinsurers.