Many reinsurance agreements require that the reinsurer provide security for the reinsurance obligations arising from the reinsurance transaction. There are many ways security may be provided. One method is establishing a trust account to hold collateral backing up the reinsurance obligation. Where the collateral is held, how it is used and who manages the collateral in the trust account is critical to maintaining viable security for the reinsurance obligations.
In a case brought in New York federal court, a cedent in a coinsurance treaty with an off-shore reinsurer, found itself without the security that it thought it contracted for.
In Great Western Insurance Co. v. Graham, No. 18-cv-6249-LTS-SN (S.D.N.Y. Jun. 25, 2024), a cedent and a reinsurer entered into a coinsurance agreement, which required that the trust account be established for collateral. Along the way, a novation took place replacing the original reinsurer with an off-shore company and the trust account was moved to a new trustee. The allegations are that the collateral was used by several individuals and their intertwined companies to defraud the cedent of the collateral.
The decision addresses motions to dismiss for lack of jurisdiction and for failure to state a cause of action. The facts, as described by the court, provide a roadmap as to what could go wrong when collateral meant to stand as security for reinsurance obligations is invested in risky investments and where those directing the investments are manipulating the situation to their own advantage. In fact, this transaction may be another example of the old adage, if it is too good to be true, it probably is not true.
Ultimately, the court held that personal jurisdiction over the trustee bank was not available because of the lack of direct and regular contacts with New York. But, after jurisdictional discovery, the court did uphold personal jurisdiction against two of the investment companies accused of participating in the fraud because of the direct contacts with New York and refused to dismiss several of the causes of action.
The decision does not delve into much in the way of reinsurance as it is a mostly procedural decision, but the facts highlight the dangers of collateralized off-shore reinsurance managed by individuals who have other plans for the security meant to secure the reinsurance obligations.
