Commentary on insurance and reinsurance disputes and related issues and the website of Schiffer Law & Consulting PLLC
Author: Larry P. Schiffer, Schiffer Law & Consulting PLLC
After 38-years with boutique and global law firms, Larry P. Schiffer launched an independent legal and consulting practice, Schiffer Law & Consulting PLLC, where he provides services as a lawyer, counselor, consultant, mediator, arbitrator and expert witness. He practices commercial, insurance, and reinsurance litigation, arbitration, and mediation. He provides advice on a wide variety of insurance and reinsurance issues, including claims and disputes, policy wording analysis and drafting, insurance insolvency issues, due diligence for transactions and have insurance or reinsurance components, insurance and reinsurance education and other advice. He is available to appear for clients outside of NY at mediations and conferences as needed on a per diem basis. He is active in legal and trade associations where he has held various leadership positions. He has lectured and has been widely published on reinsurance and other insurance topics. He serves as an Expert Commentator on reinsurance for IRMI.com and co-authored the chapter on reinsurance in the New York State Bar Association’s Insurance Law Practice treatise. He is the editor of the ARIAS•U.S. Quarterly. Mr. Schiffer received his J.D. from Albany Law School, where he graduated cum laude, was a member of the Albany Law Review and a member of the Justinian Society, and received his B.A. magna cum laude from Brooklyn College of the City University of New York. He was admitted to practice in New York in 1980.
In Wesco Insurance Co. v. Sunfund Reinsurance Ltd., No. 653136/2024 (N.Y. Sup. Ct. N.Y. Co. Jul. 23, 2025), a cedent entered into a 100% quota share reinsurance contract with a Turks & Caicos domiciled reinsurer covering vehicle service contracts and limited warranties. The reinsurance contract required a trust fund to secure the reinsurer’s liabilities. Claims came in, the trust fund was not funded, and requests for payment of claims in excess of premium go unheeded. Some of you might have heard this story before.
The cedent brought a breach of contract action and sought a conditional dismissal for the reinsurer’s failure to comply with New York Insurance Law section 1213(c) (requiring a New York license or security to file an answer). The cedent then moved for a default judgment when the conditional order under 1213(c) was not met.
In granting the default judgment the court found that the cedent met the requirements for breach of contract and specific performance for funding the trust fund (after payment of the outstanding losses). The court also granted attorney fees (specifically allowed by the reinsurance contract) but gave a 10% haircut to the cedent’s attorney fees for block billing and a lack of detail in some of the time entries.
None of this is surprising, but there are a few things to note. If you are going to do business with a captive off-shore reinsurer you might want to have the trust fund collateralized up front before any business is written to the reinsurance contract. Second, if you want attorney fees, be reasonable and have descriptive time entries showing the value of the legal work performed. Finally, while a default judgment is nice it does not pay any bills. Now you have to collect the judgment against an off-shore undercapitalized reinsurer or chase its principals under an alter-ego theory to breach the corporate veil. That too costs money.
As most people involved in insurance and reinsurance know, historical loss experience is key to underwriting and pricing reinsurance coverage. One would think the same would be true for investors in a reinsurance company. In a recent case, a federal appeals court addressed an appeal of a summary judgment motion in favor of the reinsurer against investors in a securities fraud case focused on the omission of historical loss reserves in the reinsurer’s public filings.
In In re: Maiden Holdings, Ltd. Securities Litigation, No. 24:1118 (3rd Cir. Aug. 20, 2025), the Third Circuit Court of Appeals reversed the district court’s order granting summary judgment dismissing a securities fraud case. The case focused on whether the reinsurer’s knowledge of historical loss reserves of certain business assumed from its ceding insurer and its omission to disclose that information in public filings was material under the federal securities laws.
Others have digested and analyzed this case from a securities law and fraud perspective. I won’t do that here (I am not a securities lawyer). My focus is on the loss reserve and reinsurance part of the case. What was involved here was historical loss reserve information about a large segment of the reinsurer’s assumed liabilities from a particular ceding insurer and whether that information should have been disclosed in public filings.
The opinion has several interesting observations. For example, the court described reinsurance and loss reserves and also discussed the complexities of actuarial analysis.
Reinsurance is the business of insuring insurance companies. Therefore, just like any other insurance company, reinsurers have to set aside funds to pay out future claims. These set-aside funds, known as “loss reserves,” are the product of “an insurer’s actuarial judgment” and are generally calculated based on many factors. (citation omitted). Because reserves represent predicted losses, they are effectively removed from an insurer’s operating income and treated as liabilities in financial reports. A company that sets its loss reserves too low effectively understates its liabilities, thus inflating its perceived financial strength.
In reframing and answering the legal question, the court said:
The critical question is whether the omitted historical loss data was material. Reading the record in the light most favorable to [the plaintiff], a reasonable factfinder could find that it was.
The key was that the evidence was sufficient to show that the reinsurer knew and considered the adverse loss data, but in calculating its reserves for public filing purposes chose a different reserve pick. The court pointed out that the cedent’s business was the reinsurer’s largest client relationship, that the reinsurer had access to the negative historical data, and that historical loss data was an important part of the reinsurer’s loss reserve estimation process.
. . . viewed holistically, the evidence in the current record provides the full “context” necessary to raise a genuine issue of material fact as to whether the omission of [the ceding company’]s historical loss data was material. There is evidence that [the reinsurer’s] business depended on [the cedent} and that historical trends were one of the most significant considerations when [the reinsurer] set reserves.
Essentially, the court rejected the argument that because the reinsurer considered the historical loss data and calculated its reserves differently, there was no actionable case. The court reversed summary judgment and allowed discovery to proceed at the district court level.
In my latest Expert Commentary on Reinsurance for IRMI.com, I discuss the issue of whose knowledge controls when there is an exclusion in a reinsurance contract that triggers on known exposure. See what you think and let me know.
Late notice of claim has been a difficult defense for reinsurers to sustain. But when the delay in notice is objectively unreasonable and material, it may be, as the Fifth Circuit recently found, a breach of the reinsurance contract enough to absolve the reinsurer of its duty to indemnify.
In United States Fire Insurance Co. v. Unified Life Insurance Co., No. 24-10292 (5th Cir. Aug. 14, 2025), a dispute arose involving reinsurance for a short term medical insurance claim. The underlying insured disputed the cedent’s determination on usual and customary charges and litigation ensued culminating in a class action. The cedent did not notify the reinsurer about the claim and the litigation until December 2019, although the underlying litigation commenced in April 2017. Despite taking actions that the reinsurer suggested, the cedent was unsuccessful in the underlying litigation and ultimately settled the claim. The reinsurer denied the claim based on late notice.
The reinsurer brought this action to declare that notice of the underlying litigation was untimely and prejudicial. On cross-motions for summary judgment, a magistrate judge ruled for the cedent on its counterclaim using a subjective notice test and, alternatively, found no prejudice. The reinsurer appealed.
On appeal, the 5th Circuit reversed, holding that the delay was objectively unreasonable and material and that it breached the reinsurance contract. Treaty required the cedent to give prompt notice to the reinsurer “of all Claims which, in the opinion of [the cedent], may result in a claim hereunder …. ” The issue in dispute was whether notice was required based on a subjective or objective standard of what the cedent believed.
In reversing the district court, the circuit court found that in considering the question of “whether the phrase ‘”in the opinion of’ departs from an objectively determined duty to notify, [w]e hold that the Treaty did not depart from the ordinary rule.”
We reject a subjective standard in favor of an objective one for three reasons. First, an objective reading best interprets the Treaty as a whole and in light of background principles of quota share treaty reinsurance. Second, Texas authority, albeit sparse, suggests that Texas courts would agree that an objective standard controls. Third, most other jurisdictions faced with similar provisions apply an objective standard.
In describing the notice provision in the reinsurance contract, the court stated as follows:
This notice provision, particularly in this quota share reinsurance contract, enables the reinsurer to assess its exposure for financial and underwriting purposes, and to participate in defending a claim as authorized by the Treaty. Notice is only valuable if it arrives “promptly,” in time for action. The sophisticated parties to this agreement had to assume that “the opinion of’ [the cedent], even if “subjective,” would be grounded in its professional experience and familiarity with potential claims. Objective reality, in other words, was implicit in [the cedent]’s opinion. From this standpoint, referencing [the cedent]’s opinion of a potential claim actually reinforces what should be an objective standard for the duty to notify. The phrase “in Unified’s opinion” is best interpreted to harmonize with the objective standard expressly connoted by the stock phrase requiring prompt notice “of all Claims which … may result in a Claim” under the Treaty.
The court held that
Based on an interpretation of the provision that makes sense of the whole policy and background reinsurance principles, the arguable support of Texas cases, and the interest in uniformity, we conclude that the Treaty provision required [the cedent] to provide prompt notice to [the reinsurer] of what a reasonable reinsured would believe “may result in a claim” under the Treaty.
Having found what the notice clause required, the court went on to hold that the cedent breached the notice provision. First the court considered when a reasonable cedent would have known that its duty to provide prompt notice of the underlying litigation was triggered and whether the cedent’s notice was reasonably prompt after that point. The court held that notice was not reasonably prompt based on the facts.
The court also held that the unreasonable notice was prejudicial to the reinsurer based on a material breach of the reinsurance contract.
. . . we hold that [the reinsurer]’s right to assist in [the cedent]’s defense of the [underlying] litigation was severely prejudiced when [the cedent] provided notice after summary judgment had been awarded to the individual plaintiffs, after a class was certified, and after a petition for interlocutory appeal on class certification was denied.
* * *
Based on these facts, [the reinsurer] was plainly deprived of the benefit it expected from the Treaty’s notice provision. [The reinsurer] was prejudiced in several concrete ways by deprivation of its Treaty right to assist [the cedent]’s defense. Because it did not receive notice until after an adverse summary judgment, the defendant’s ability to introduce new expert testimony or obtain a different disposition was radically narrowed. [The reinsuer]’s receipt of notice after summary judgment was more prejudicial than notice given with trial “rapidly approaching.” (citations omitted).
The opinion outlines in detail why there was prejudice based on the specific facts of the case. It provides a roadmap to reinsurers who believe that they have been prejudiced by late notice. It is always better to give notice early and often rather than wait for an adverse ruling, particularly one that objectively precludes a reinsurer from associating in the defense of the claim.
Policyholders and claimants seeking to access reinsurance contracts and other reinsurance information and communications to support their claims continues to take up plenty of judicial time. Courts are split on the issues, but the issues are all fact-dependent. In this post, I discuss two cases from this year where both courts granted motions seeking to disclose reinsurance information.
In Divinity v. Bridgefield Casualty Insurance Co., 3:24-cv-00522-LGI (S.D. Miss. Apr. 28, 2025), a pro se plaintiff, among other things, requested production of its insurer’s reinsurance agreement. The insurer moved to limit the disclosure of the reinsurance agreement. The insured sought the reinsurance agreement as relevant to the claim for bad faith coverage denial. The dispute centered on the initial disclosure requirement in Federal Rule of Procedure 26(a)(1)(A)(iv), which requires disclosure of
any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.
In denying the insurer’s motion to limit disclosure, the court held that “[the insurer] is self-insured and could satisfy the full amount of damages sought by Plaintiff is not a sufficient reason to excuse disclosure of [ the insurer’s] reinsurance agreement.” The court cited other cases where courts have held reinsurance agreements fit within the scope of 26(a)(1)(A)(iv) and found that it would not be burdensome for the insurer to produce the reinsurance agreement.
In Sinclair, Inc. v. Continental Casualty Co., No. 1:24-cv-03003-SAG (D. Md. Apr. 28, 2025), a coverage dispute arose over a cyber loss when the insurers denied coverage. A magistrate judge was asked to address a number of discovery disputes, including the policyholder’s request for production of reinsurance agreements and communications concerning reinsurance for cyber claims. The policyholder argued that the reinsurance information was relevant to its claim for bad faith.
While noting the diversity of decisions among the courts, the magistrate judge ultimately ruled that “that the reinsurance policies, as well as related documents and communications, are relevant to [the policyholder’s] bad faith claim and should be produced.” But because of the broadness of the document request, the court limited what information needed to be produced:
The Court will therefore limit Request No. 20 to all documents and communications shared between [the insurer] and [its] reinsurer(s)retrocessionaire(s), or their representatives, concerning the cyber claim, the [insurer’s] policy, or any reinsurance policy providing coverage to [the insurer] for [the policyholder’s] cyber claim.
What we glean from these cases is that courts seem to think reinsurance agreements are relevant to bad faith claims handling coverage disputes but will limit the information disclosed to those agreements and communications concerning the claim in dispute.
Traditionally, a policyholder cannot sue a reinsurer without privity of contract or some exceptional circumstance. In a recent case, a Texas federal court denied a motion to dismiss the complaint filed by a policyholder against a reinsurer based on a finding that there was an implied agreement based on course of conduct.
In Indorama Ventures Holdings L.P. v. Factory Mutual Insurance Co., No. 1:24-cv-00404 (E.D. Tex. Aug. 7, 2025), the policyholder brought a breach of contract and declaratory judgment action to recover the full value of business interruption losses caused by an explosion. The policyholder had already recovered $50 million and was seeking an additional $50 million. The reinsurer moved to dismiss the complaint for failure to state a cause of action (no right to sue the reinsurer).
The facts indicate that the property and business interruption policy was issued by a captive insurer and reinsured by the reinsurer. But the reinsurer was the party who was obligated to adjust and pay any claims. In fact, the reinsurer adjusted and paid the first $50 million claim. The policy was originally issued to a third-party that the policyholder purchased, and the parties signed an insurance assignment agreement. That assignment agreement was agreed to by the reinsurer, which acknowledged its role in adjusting and paying claims directly to the policyholder.
Ultimately, the court denied the motion to dismiss the complaint. The court found that the reinsurance agreement was outside the complaint and did not need to be considered. But even if the reinsurance agreement was considered by the court, the complaint still stated a cause of action. Why, because of a Texas law.
A person does not have a right against a reinsurer that is not specifically stated in: (1) the reinsurance contract; or (2) a specific agreement between the reinsurer and the person.
As the court found, “[]he relevant ‘right’ in this case is [the policyholder’s] right to sue [the reinsurer] directly.” That right, held the court, did not exist under the reinsurance agreement.
First stop, § 493.055(1). The Reinsurance Agreement clearly forecloses [the policyholder’s] right to directly sue. A section entitled “B. Cooperation of the Company” cabins the rights created by the Reinsurance Agreement: “In no event shall anyone other than [the cedent] or, in the event of [the cedent’s] insolvency, its receiver, liquidator, or statutory successor, have any rights under this Agreement.” A separate section entitled “X. Exclusive Contract” similarly provides that “[i]n no event shall any party, other than [the cedent], or in the event of [the cedent’s] insolvency, its liquidator, have any rights against [the reinsurer] under this Reinsurance Agreement.”
But that was not the end of the inquiry. Under subsection (2) of the statute, if there is a “specific agreement” between the reinsurer and the policyholder, then a direct action is possible. Ultimately, the court determined that a specific agreement existed based on course of conduct. The court’s rationale was based on its view that the Texas Supreme Court would find that an “agreement” included an agreement based on course of conduct and that the facts pled, including certain adjustment communications attached to the motion, and the insurance assignment agreement, demonstrated course of conduct leading to an agreement between the reinsurer and the policyholder that the reinsurer would adjust and pay claims under the property policy.
In denying the motion to dismiss, the court held that the policyholder has sufficiently pled a right to sue the reinsurer directly based on an implied agreement outside the reinsurance agreement.
This could not have been a shock to the reinsurer given the insurance assignment agreement and its role in adjusting and paying the claims. But as the court stated, there are some factual issues and those will come out in summary judgment or trial if the case gets that far (which it might given the $50 million claim).
My latest IRMI.com Expert Commentary on Reinsurance discusses what can happen when reinsurance contracts are out of alignment with the policies reinsured. You can read the commentary here.
For decades, those seeking to enforce arbitration clauses in insurance policies have, in certain states, faced a major obstacle: reverse preemption. Reverse preemption is essentially using a state law precluding arbitration clauses in insurance policies to override — or reverse preempt — enforceability of arbitration through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) based on the McCarran-Ferguson Act, which allows state insurance laws that regulate the business of insurance to override general federal laws that are not specific to insurance and, in the case of an international treaty, that are not self-executing. The Second Circuit Court of Appeals, since 1995, has held that the New York Convention was not self-executing. That holding has now been reversed.
In Certain Underwriters at Lloyd’s, London v. 3131 Veterans Blvd LLC, Nos. 23-1268-cv and 23-7613-cv (2d Cir. May 8, 2025), a surplus lines insurer issued policies to two insureds with identical arbitration clauses. The insureds sued the insurer in state court in Louisiana over hurricane losses and the insurers sued in New York federal court to compel arbitration under Chapter 2 of the Federal Arbitration Act and the New York Convention. The insureds argued reverse preemption to dismiss the cases. Both of the underlying decisions held in favor of the anti-arbitration provisions in Louisiana’s insurance law based on reverse preemption and the Second Circuit’s holding in Stephens v. American International Insurance Co., 66 F.3d 41 (2d Cir. 1995), and denied the insurer’s petitions to compel arbitration.
The insurer appealed the dismissals arguing that subsequent U.S. Supreme Court precedent required an abrogation of Stephens and enforcement of the arbitration clauses under the New York Convention. In reversing and remanding, the Second Circuit held that its reasoning in Stephens has been fatally undermined by the Court’s holding in Medellin v. Texas, 522 U.S. 491 (2008). The bottom line is that Stephens has been abrogated to the extent that it held that Article II, section 3 of the New York Convention is not self-executing.
The main issue the court addressed was articulated as follows:
Accordingly, the principal disagreement in this case is whether Article II Section 3 of the New York Convention is “self-executing,” making it exempt from reverse-preemption under the MF A, or whether it relies on an Act of Congress for its effect, such that it can be reverse-preempted by Louisiana law.
The circuit court described how the Court in Medellin identified the hallmarks of a self-executing treaty provision within the larger treaty. Using those hallmarks, several courts, including the First and Ninth Circuits have held that Article II, Section 3 of the New York Convention is self-executing. Based on these cases, the Second Circuit reconsidered its analysis in Stephens and agreed with the First and Ninth Circuits. It found that the text of Article II, Section 3 of the New York Convention was self-executing under the Medellin factors (it provides a directive to domestic courts and that the US “shall” or “must” take a certain action).
Because the court held that under the Medellin test Article 11, Section 3 of the New York Convention is self-executing, it cannot be reverse preempted under the McCarran-Ferguson Act. This should mean that if a case falls under Article 11, Section 3 of the New York Convention, state anti-arbitration laws will not override the policy in favor of international commercial arbitration.
The grounds for vacating an arbitration award under the Federal Arbitration Act (“FAA”) are limited. For decades, however, parties have raised manifest disregard of the law as a ground for vacatur. Many courts have limited or rejected manifest disregard as a basis to vacate an arbitration award. In a recent decision, the Fifth Circuit Court of Appeals in a non-reinsurance case has relegated manifest disregard to the dustbin of history.
In United States Trinity Energy Services, L.L.C. v. Southeast Directional Drilling, L.L.C., No. 24-10823 (5th Cir. Apr. 28, 2025), parties to a pipeline construction contract arbitration cross-petitioned to confirm and vacate a final award. The Texas District Court denied the petition to vacate and granted the petition to confirm. The losing party appealed to the 5th Circuit on this basis:
Trinity Energy appeals on the grounds that “the arbitration panel exceeded its authority and acted in manifest disregard of the law.” The contractor specifically contends the arbitration panel “failed to harmonize numerous subcontract provisions limiting Trinity’s obligation to pay Southeast’s standby costs.”
In affirming the order confirming the arbitration award, the circuit court flatly rejected manifest disregard of the law as a basis for vacating an arbitration award under the FAA. The court stated what we all know: vacating an arbitration award happens only in very unusual circumstances and that judicial review of an arbitration award is extraordinarily narrow.
The court noted that only limited circumstances allow for vacatur of an arbitration award. Indeed, stated the court, Section 10 of the FAA provides the exclusive statutory grounds. In addressing the argument that the arbitration panel exceeded its powers, the court held as follows:
The final award reveals the arbitration panel reviewed the evidence presented, considered the effects of various provisions in the subcontract, and concluded that Trinity Energy owed Southeast Drilling for stand-by costs. Vacatur is therefore unjustified under § 10(a)(4) because Trinity Energy failed to show the arbitration panel exceeded its powers by disregarding the subcontract entirely. The parties bargained for this dispute resolution arrangement, and we conclude this arbitration panel’s “construction holds, however good, bad, or ugly.” (citations omitted).
Getting to manifest disregard, the court noted that manifest disregard is not one of the statutorily enumerated grounds for vacatur and articulated the appellant’s argument as follows:
Although “manifest disregard of the law” is not a freestanding ground for vacatur of an arbitration award in our circuit (citation omitted), Trinity Energy alleges that manifest disregard of the law remains viable “as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.” In other words, Trinity Energy essentially ignores its inapplicability as an independent basis while simultaneously attempting to subterfuge this non-statutory ground for vacatur within § 10(a)(4).
This the court rejected, holding that “[o]ur court has never held that “manifest disregard of the law” is a basis to establish that arbitrators “exceeded their powers” under § 10(a)(4).”
In short, we cannot substitute a court panel’s judgment in place of an arbitration panel’s decision by recognizing “manifest disregard of the law” as a basis for vacatur embedded within § 10(a)(4).
In the Fifth Circuit, any attempt to use manifest disregard as a basis to vacate an arbitration award will fail. Of course, this applies to arbitration awards rendered in reinsurance disputes as much as any other commercial arbitration.
Joint insurance funds provide coverage to members and often purchase reinsurance to protect the fund. In a recent case, an issue arose concerning competing insurance policies and coverage provided by a joint insurance fund covering a loss and whether the fund’s purchase of reinsurance triggered the “other insurance” clause in the competing insurer’s policy making the fund the primary insurer.
In National Union Fire Insurance Company of Pittsburg v. Somerset County Joint Insurance Fund, No. 24-196 (ZNQ)(JBD) (D. N.J. Jan. 6, 2025), a joint insurance fund and an auto and excess carrier disputed which policies were primary and which were excess after settling a catastrophic loss. The fund had purchased reinsurance, which reduced its $5 million limit down to $250,000. All policies had “other insurance” clauses. The question was whether the carrier’s “other insurance” clause applied because the fund provided “insurance,” which would make the carrier’s policy excess of the fund’s coverage.
The excess carrier sought discovery of the reinsurance coverage purchased by the fund to demonstrate that the reinsurance policy triggered the “other insurance” clause and that the fund’s exposure over its retention was not self-insurance but was “insurance” because of the reinsurance policy.
In denying the discovery request, the court held that the governing statute and an opinion of the New Jersey Supreme Court made it clear that the discovery sought was not relevant because even when a joint insurance fund obtains reinsurance, it does not convert to providing “insurance,” but continues to allow its members to self-insure. The court also found that the discovery requested was not proportional to the needs of the case given that the carrier had the reinsurance contract and the fund was willing to make a witness available to discuss its risk management plan and operations. The court noted that nothing in its discovery determination precluded the carrier from making its arguments on a substantive motion in the future.
