Most reinsurance contracts have a provision that allows the reinsurer to inspect or audit the books and records of the cedent or the cedent’s agent. The reasons behind this provision are obvious. The reinsurer needs to know if premiums or losses are being booked and handled correctly given that the reinsurer is indemnifying the cedent for losses under the insurance policies ceded to the reinsurance contract. Where an agents like MGAs or TPAs are involved, audits are even more important because of the third-party nature of the arrangement and because of commission and profit sharing provisions.
The scope of the right to inspection, however, differs by clause. Some inspection clauses are very detailed and some are cursory statements of an audit right. Some restrict rights and some are expansive. As in most cases, the parties only get the rights that they bargained for and included in the reinsurance contract.
In a recent Texas case, a reinsurer brought suit over its right of inspection of the cedent’s managing general agent’s files.
In Antares Reinsurance Co. Ltd. v. National Transportation Associates, Inc., No. 4:23-cv-00928-P (N.D. Tex, Mar. 20, 2024), the reinsurer of a book of business written by a transportation MGA made a written demand for an audit to which the MGA imposed several conditions (30-days notice, counsel not involved, at the MGA’s office). The reinsurer brought suit to, among other things, enforce its audit rights. The MGA moved to dismiss.
In granting the MGA’s motion to dismiss the counts related to the inspection (specific performance), the court found that the issue was moot because the reinsurer had been granted the right to audit and, in fact, had an auditor perform the audit. The record, the court explained, showed that the reinsurer openly acknowledged that the MGA offered its books and records for inspection and that the reinsurer just disputes the format in which they did. (“[the MGA]’s books and records remained available for inspection and were, in fact, inspected by [the reinsurer] during August and September 2023.”). This, the court held, rendered the reinsurer’s claim for specific performance moot.
The court noted that the relevant contracts required the MGA to keep the books and records at its California office and that the MGA made that office available for the audit. The court stated that the reinsurer’s dispute was not really about the MGA’s refusing access to books and records—it was about how the MGA permitted the inspection. Moreover, the record showed that the MGA communicated willingness to cooperate with the reinsurer’s inspectors but declined the reinsurer’s additional (non-contractual) demands. Neither the administrative agreement nor the reinsurance contract required a specific format or protocol and neither required the MGA to bear the costs of inspection.
The court went on to provide this sage advice to contracting parties:
In many respects, this case serves as a lesson in Murphy’s Law for unwitting contractees. The [contracts] left many details unspecified vis-à-vis how [the MGA] must permit inspection. [The reinsurer] cannot bring a breach claim for [the MGA’s] failure to comply with terms not in the contract—and the Court will not order specific performance of obligations not imposed by the legal instrument itself. When negotiating and drafting contracts, contractees should fully utilize their imaginative faculties to consider situations like this, where one party may want to act upon a particular contractual right but will need provisions enumerating who does what and which party foots the bill.
This is an old story. As I like to say when speaking or writing on reinsurance contract wording issues, “say what you mean and mean what you say” when drafting your reinsurance contract. Otherwise, you may be seeing me in an arbitration.
