Ten Years After – When Old Reinsurance Obligations Fail

It is quite common to have a transaction where a company essentially takes over another company and reinsures its obligations 100%. Several years later, the acquiring reinsurer may sell the acquired ceding company as a “clean shell.” Of course, the new acquiring company that buys the shell wants the original 100% reinsurance agreement to remain in force. After 10 years or more, sometimes things go awry.

In Sparta Insurance Co. v. Pennsylvania General Insurance Co., No. 21-11205-FDS (D. Mass. Aug. 9, 2022), the acquirer of a supposed “clean shell” sought a declaratory judgment in federal court against the seller when, allegedly, after ten years or more, legacy claims against the “shell company” that were supposedly 100% reinsured by the shell’s seller were not being administered or paid. The case is mostly a federal procedural case, dealing with whether the buyer’s complaint was sufficient to withstand a motion to dismiss, standing, federal jurisdiction and other technical issues not relevant to reinsurance.

In its analysis on whether the complaint was sufficient to withstand the motion to dismiss, the court stated that “[w]hile it is far from clear, it appears that the complaint thus alleges that claims are not being administered or paid on a wholesale basis in violation of the SPA and the reinsurance agreement. In other words, it appears to allege that claims are not being declined on an individualized basis, according to individualized coverage determinations, but that all claims are being declined, regardless of the underlying issues.” The seller’s argument focused on the lack of individualized claims being denied as injuries to the buyer. The court made it clear that the allegations of the wholesale lack of claims administration and payment is sufficient to survive the motion to dismiss.

Ultimately, the court denied the seller’s motion to dismiss and allowed the buyer’s case to move forward. But the court noted that “[w]hile additional facts and details will surely be critical to resolve a motion for summary judgment, ‘their absence does not support a motion to dismiss'” (citations omitted).