Traditional reinsurance programs tend to cover a cedent’s underlying policies over many years. Although a long-term relationship may exist, typically the reinsurance only covers policies or claims within a particular policy year. If, in those circumstances, the reinsurance attaches over a retention, then losses incurred in different policy years generally are subject to separate retentions, which could limit the reinsurance recovery if the claims arise out of the same dispute. If, however, the underlying losses constitute a single wrongful act, then perhaps only one retention is required. The number of retentions may make the difference between a limited reinsurance recovery and a more substantial reinsurance recovery. A recent case addressed this issue.
In Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20cv300-MHT (M.D. Ala. May 23, 2024), a municipal pool cedent brought suit against its long-time reinsurer over multiple claims over multiple policy years. There have been several opinions issued arising from this dispute, some of which have been the subject of earlier Schiffer on Re-Insurance Blog posts.
This decision focuses on a particular underlying claim of breach of contract between the municipal insured and a claimant. The claim was resolved and the cedent billed the reinsurer for defense expenses. The reinsurer refused to indemnify the cedent for the full expenses citing the $350,000 retention before reinsurance will respond. In the reinsurer’s view, there were two underlying claims two years apart and they should have been ceded to two separate treaties and subject to two separate retentions. In other words, the claim was made up of two wrongful acts, not a single wrongful act. Before the court was the reinsurer’s motion for summary judgment.
The question on summary judgment, as articulated by the court was:
At its core, the [insured’s] claim is about whether the 2006 rezoning decision and 2008 alterations in traffic flow constitute “the same or substantially same or continuous or repeated Wrongful Acts” such that the polices treat them as one wrongful act.
In granting summary judgment in favor of the reinsurer, the court carefully analyzed both the cedent’s policies and the two relevant treaties in determining that the two underlying claims were not subject to the same treaty and only one retention; i.e., two separate wrongful acts. The cedent argued that the claim was a single wrongful act (discriminating against the claimants to prevent development of their property). In making that argument, the cedent argued that the underlying actions taken by the municipal defendant were “related” to each other.
The court rejected this argument on several grounds, the key ground being that the definition of wrongful act in the policies did not use the word “related” or anything similar, but required that the claims must arise out of the same or substantially same or continuous or repeated wrongful acts.
All Claims and Damages arising out of the same or substantially same or continuous or repeated Wrongful Acts will be considered as arising out of one Wrongful Act.
The court held that the cedent had not advanced a reasonable interpretation of the policies that would support collapsing the 2006 rezoning decision and 2008 alterations in traffic flow into one wrongful act, and found that the cedent had misread the policies. As stated by the court:
The word `related’ does not appear in the policies’ definition of wrongful acts. Under that provision, only “the same or substantially same or continuous or repeated Wrongful Acts will be considered … one Wrongful Act.”
The court rejected the cedent’s case law analysis and easily distinguished the cases cited and also noted that the policies speak of similar wrongful acts not acts with a similar wrongful purpose. The court found that the bare allegation of a shared objective did not transform otherwise disparate acts into the same, substantially the same, continuous, or repeated acts. “That is especially true here, where the 2006 rezoning decision and 2008 alterations in traffic flow were separated by two years.”
The court ultimately concluded as follows:
In sum, no reasonable factfinder could conclude that the policies treat [the insured]’s rezoning decision in 2006 and the changes it approved to the flow of traffic in 2008 as a single wrongful act. Because the [claimant’s] complaint centered on two distinct wrongful acts during different policy periods, their lawsuit triggered the 2006 and 2008 policies that [the cedent] issued to [the insured], as well as the treaties that reinsured them. The two treaties independently required [the cedent] to bear the first$350,000 of its losses, which means that [the reinsurer] correctly deducted two retentions from [the cedent’s] total litigation expenses. Summary judgment will therefore be granted to [the reinsurer] on [the cedent’s . . .] claim.
The details of definitions in insurance and reinsurance policies, especially definitions that affect coverage, are critical to determining whether a recovery is available. Courts will not read words into insurance and reinsurance contracts, especially if there is no ambiguity.
