Asbestos claims continue to spawn reinsurance disputes over facultative reinsurance coverage of expenses in addition to the limits. What happens when the issue is decided in an arbitration between a ceding insurer and one reinsurer and the ceding insurer raises the same issue against another reinsurer in a subsequent litigation?
In Amerisure Mutual Insurance Co. v. Swiss Reinsurance America Corp., No. 24-1492 (6th Cir. Nov. 4, 2025) (Not Recommended for Publication), the circuit court affirmed an order of the district court granting a reinsurer’s motion for summary judgment based on collateral estoppel. The dispute was over expenses in addition to the limits for defending asbestos cases against the underlying insured. The ceding insurer issued primary and umbrella policies and reinsured the umbrella policies with the reinsurer under facultative certificates.
The real issue here is the ceding insurer’s prior arbitration with another facultative reinsurer where the arbitration panel in its final award held that the reinsurer did not have to pay expenses outside the limits of the umbrella policies under the facultative certificates. Subsequent to that arbitration the ceding insurer sought judicial confirmation of the award (based on other elements of the award that were favorable to the ceding insurer).
When the ceding insurer brought the underlying action against the second reinsurer arguing the same issue concerning whether the facultative certificate had to pay the umbrella expenses in addition to the limits, the reinsurer countered with a motion for summary judgment for collateral estoppel based on the prior arbitration award that was confirmed in court. The district court agreed and granted the reinsurer summary judgment.
On appeal, the Sixth Circuit affirmed. While the opinion is not recommended for publication and is therefore not precedent, the court provides a clear roadmap for analyzing whether a prior arbitration award in favor of a different reinsurer can support collateral estoppel for a different but similarly situated reinsurer so it is worth the read.
In essence, the court found that all the elements of collateral estoppel or issue preclusion applied and rejected the ceding insurer’s arguments to the contrary. The court found that the main issue being litigated — whether the ceding insurer’s reinsurers must reimburse it for defense costs it paid to its insured over the umbrella limits — was raised and actually litigated in the earlier arbitration. The court found that the arbitration record and award indicate that the umbrella drop-down provision was necessarily decided against the ceding insurer even though it was not expressly mentioned in the award.
The court found that the ceding insurer had the opportunity to fully and fairly litigate the defense cost issue in the arbitration. It noted that the ceding insurer sought to confirm the award and rejected the ceding insurer’s argument that the limited opportunity to “appeal” an arbitration award should preclude collateral estoppel. The court also rejected the ceding insurer’s argument that the “honorable engagement clause” and the difference in how an arbitration is conducted compared to a court proceeding should preclude collateral estoppel. The court noted that the ceding insurer had not shown the arbitration to be unfair or that the decision was unreliable.
The court also rejected the argument that mutuality of estoppel precluded collateral estoppel finding that the ceding insurer’s argumentative posture in both proceedings was the same. The court held that requiring mutuality would encourage gamesmanship.
At bottom the court held that precluding the ceding insurer from relitigating the same issue against the second reinsurer served an essential purpose of the collateral estoppel doctrine, which is to promote judicial economy by preventing needless litigation.
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.
Several states have anti-arbitration statutes that apply to insurance. In Louisiana, a state with such a statute, it as been an open question whether its anti-arbitration statute applies to surplus lines contracts. The Fifth Circuit, as answered that question.
In affirming, the court carefully analyzed Louisiana case and statutory law. The argument to avoid reverse preemption and sustain the arbitration clause rested with paragraph D of the statute, which provides:
The provisions of Subsection A of this Section shall not prohibit a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance.
The question was whether arbitration, which is a “forum,” means that an arbitration clause in a surplus lines insurance contract–a policy form that is not subject to regulatory approval–may go forward in Louisiana in spite of the anti-arbitration statute. The circuit court answered that question in the negative. The court found that if the legislature when amending the statute to add paragraph D meant to allow arbitration under surplus lines contracts it would have said so. Additionally, it appeared that the legislature considered an arbitration clause a qualitatively different form of forum selection clause in the face of long-standing anti-arbitration history in Louisiana.
In rejecting the insurer’s arguments, the court held that:
General principles of contractual freedom, however normatively attractive in the surplus lines insurance business, cannot trump specific statutory commands. We are in no position to second-guess the wisdom of the Louisiana Legislature on this point; our duty is only to determine, as best we can, how the Louisiana Supreme Court would read § 22:868in this context.
Finally, in rejecting the principle that questions of arbitrability go to the arbitrator where there is a broad arbitration clause, the court concluded:
But, according to our precedent, this is a second-order question that follows one we have already answered: whether the parties have a valid agreement to arbitrate. We have already concluded, of course, that they do not, and if that is correct, we need not go any further. When a statute prevents the valid formation of an arbitration agreement, as we read § 22:868 to do, we cannot compel arbitration, even on threshold questions of arbitrability.
In 2024, the United States Supreme Court answered the question of whether a case should be stayed or dismissed if arbitration is compelled. Courts also continued to enforce arbitration rights and compel arbitration and addressed discovery of reinsurance information issues, questions of sealing of reinsurance information, jurisdiction, and a rare late notice case.
In the reinsurance context, questions of arbitrability continued to arise in 2024 and the courts continued the trend of enforcing arbitration clauses and compelling arbitration.
Arbitrability and Motions to Compel Arbitration
For some time, there has been a federal circuit split on whether a district court may dismiss a case where a dispute is subject to arbitration under section 3 of the Federal Arbitration Act (“FAA”) and one of the parties asks the court to stay the action pending arbitration rather than dismiss the proceeding. That question has now been answered by a unanimous United States Supreme Court in a non-reinsurance situation, but which is relevant to reinsurance arbitrations.
In Smith v. Spizzirri, No. 22-1281 (U.S. Sup. Ct. May 16, 2024), an employment dispute, the case was removed to federal court and one side sought to compel arbitration and dismiss the case. The other side agreed that the dispute was arbitrable, but asked the court to stay the litigation pending the outcome of the arbitration. The district court dismissed the case and the Ninth Circuit affirmed. The question for the Court was: “. . . whether §3 [of the FAA] permits a court to dismiss the case instead of issuing a stay when the dispute is subject to arbitration and a party requests a stay pending arbitration.”
In a unanimous opinion issued by Justice Sotomayor, the answer was “It does not.” What this means is that in any litigation, including insurance or reinsurance disputes, where a motion or petition is made to compel arbitration and dismiss the action, if the court determines that arbitration is in order but the other side (or any party) asks the court to stay the action pending arbitration, under Section 3 of the FAA, the court must stay the action. Dismissal in the face of a request for a stay is no longer an option for district courts.
The Court’s opinion is based on statutory interpretation. As the Court stated:
In this statutory interpretation case, text, structure, and purpose all point to the same conclusion: When a federal court finds that a dispute is subject to arbitration, and a party has requested a stay of the court proceeding pending arbitration, the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.
Essentially, what the Court held is that “shall” means “shall” and “stay” means “stay.” Section 3 provides that the district court:
shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
The Court concluded with good reasons for why a stay is appropriate and left it to the district court to find ways to avoid an unnecessary administrative burden to keeping the case on the docket:
Finally, staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts. The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator, see 9 U. S. C. §5; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see §7; and facilitating recovery on an arbitral award, see §9. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections. District courts can, of course, adopt practices to minimize any administrative burden caused by the stays that §3 requires.
Simple and straightforward. And in a footnote, the Court reminds the district courts that dismissal may be appropriate for other reasons (e.g., lack of jurisdiction).
Arbitrability is always tricky where contracts are decades old and successor parties are involved. In Catalina Worthing Insurance Ltd. v. NEM-Re Receivables, LLC, No. 24-CV-4566 (VEC) (S.D.N.Y., Dec. 12, 2024), the court addressed a motion to stay arbitration and a motion to dismiss the claims as time-barred. The original cedent and reinsurer are long gone from this 50 year’s old relationship. The original cedent became insolvent and its receivables were assigned to the party seeking the reinsurance recoverables from the reinsurer’s successor. The assignee served an arbitration demand and the successor reinsurer brought this action to stay arbitration because there was no agreement to arbitrate.
The court granted the motion to stay the arbitration because the assignee failed to provide evidence of a binding arbitration agreement. Because the court found that the dispute was not arbitrable it next addressed the time-bar claim. The court denied the successor reinsurer’s motion for a declaratory judgment on this issue and set the case for discovery.
Petitions to Confirm or Vacate Arbitral Awards – Sealing
Parties to reinsurance arbitrations often file in court to confirm (or vacate) arbitral awards. Some file even though the adverse party has complied with the arbitration award. When doing so, they invariably invoke the arbitration’s confidentiality agreement to seal the award and other related documents used in the petition to confirm. Must the court confirm and must the court seal the documents? We have seen this movie before.
In General Re Life Corp. v. American General Life Insurance Co., No. 23-cv-05219(ALC) (S.D.N.Y. Mar. 28, 2024), a reinsurer brought a petition to confirm an arbitration award arising out of a Yearly Renewable Term (“YRT”) reinsurance rate increase dispute and both parties sought to seal exhibits and portions of the petition to confirm.
The cedent, rather than paying the increased reinsurance rates ordered by the arbitration panel, opted to recapture the business. The cedent challenged the court’s jurisdiction to hear the petition for lack of jurisdictional amount because the recapture negated the monetary amount of the award.
The court refused to seal the documents (including the final award), accepted jurisdiction and confirmed the award. In so doing, the court found that all the documents for which sealing was sought all directly affected the court’s adjudication of the petition. As to the arbitration confidentiality agreement, something that is agreed to in nearly every reinsurance arbitration, the court noted that “[c]ourts in this District have consistently held that Parties’ interest in a confidentiality agreement enacted between them is not sufficient on its own to overcome the interest of public disclosure and transparency.” Further the court held that “[t]he Parties do not unseat this Court’s widely held view here as their confidentiality agreement “itself recognizes that the interest in confidentiality is not absolute [because] disclosure is permitted when necessary to confirm . . . an award.” (citations omitted). In a footnote, the court stated that “the contents of the arbitration information are judicial documents upon which this Court bases its rulings here such that the constitutional and federal common law public interest applies.”
The court rejected what it described as the parties’ “vague, general and undifferentiated claims of impending harm” and stated that “[t]he Final Award and arbitral communications are highly relevant to the dispute here not only because they form the foundation of the Court’s decision on whether to confirm the Award but also because they are integral to the Court’s adjudication of Respondent’s jurisdictional claims.” The motions to seal were denied.
On the jurisdictional argument raised by the cedent, the court held that the amount in controversy requirement was satisfied as the final award and the reinsurer’s demand in arbitration exceeded $75,000. The court noted that ‘[t]he mere fact that the Arbitration Panel granted an alternative award under which Respondents could elect to recapture the reinsurance contracts does not drive the award amount to $0.” The court dismissed the jurisdictional challenge and confirmed the award (there was no argument to vacate the award for any substantive reason).
Where a party petitions to confirm an arbitration award and the respondent defaults, a court may convert a motion for a default judgment into a motion for summary judgment and, if the facts are there, confirm the arbitration award. Swiss Reinsurance America Corp. v. Go Re, Inc., No. 24-CV-518 (KMK) (S.D.N.Y. Sep. 3, 2024).
Issue Preclusion/Collateral Estoppel of Arbitration Awards
Some reinsurance disputes repeat. Either they involve different reinsurers on the same contract or different reinsurers on the same claim or different reinsurers on similar contracts on the same basic issue. Where a cedent loses an arbitration on an issue that repeats in a subsequent reinsurance dispute, should the cedent be estopped from seeking a reinsurance recovery from the other reinsurer?
In National Casualty Co. v. Continental Insurance Co., 121 F.4th 1151 (7th Cir. 2024), the parties resolved an earlier dispute in arbitration and the awards were confirmed. Later, another dispute arose and the cedent demanded arbitration. The reinsurers filed suit in federal court arguing that the cedent was precluded by issue preclusion based on the prior awards from arbitrating the dispute. The district court granted the cedent’s motion to compel arbitration holding that the binding effect of the prior arbitration awards was for the arbitrators to decide. The Seventh Circuit affirmed.
In affirming, the circuit court stated that “[o]ur case law establishes that the preclusive effect of an arbitral award is an issue for the arbitrator to decide, not a federal court.” Noting consistency with U.S. Supreme Court precedent, the circuit court noted that “the Court has repeatedly instructed that, under the FAA, arbitrators presumptively decide procedural issues that ‘grow out’ of an arbitrable dispute and ‘bear on its final disposition.’”
In Amerisure Mutual Insurance Co. v. Swiss Reinsurance America Corp., No. 22-cv-12298 (E.D. Mich., Mar. 28, 2024), a facultative reinsurer moved for summary judgment to estop the cedent from seeking a reinsurance recovery of costs in addition to the limits of the underlying umbrella policies because of an earlier arbitration award confirmed in court that held for another reinsurer on the same facts. In denying the cedent’s motion for summary judgment and granting summary judgment to the reinsurer, the court upheld the reinsurer’s assertion of collateral estoppel based on the earlier arbitration award.
The underlying policies were two umbrella policies that were facultatively reinsured. The underlying claims were asbestos claims. The primary policies were exhausted and the cedent started paying defense costs out of the umbrella policies, but in addition to the policy limit. The reinsurer paid its limit under the facultative certificates but refused to pay defense costs in addition to the limit.
The same issue arose with another reinsurer earlier and the issue went to arbitration. The award in favor of the reinsurer was confirmed by the federal court in Illinois. As stated by the Illinois federal court, the arbitration panel found that “the umbrella policies did not pay defense costs in addition to limits when their coverage was triggered by the exhaustion of underlying primary policies”; under the policies, defense costs were only to be paid outside of limits where the claims were “not covered” by the primary policies and that was not the case here.
Here, the court rejected most of the cedent’s contract interpretation arguments for why defense costs were outside the limits. Instead, it found that the issue was identical to the issue raised in the prior arbitration and that the cedent was merely arguing, in part, a new theory over the same issue: is the reinsurer liable for defense costs paid in excess of the underlying umbrella limits. The court found that the arbitration panel definitively decided the issue in dispute. The court concluded as follows:
Put simply, because the arbitration panel decided how to interpret the umbrella policies in relation to whether [the cedent] had to pay defense costs in addition to policy limits, [the cedent]’s policy interpretation arguments are precluded. [The cedent] may not avoid collateral estoppel by framing different legal theories or arguments as separate issues.
The court also rejected the cedent’s various arguments why collateral estoppel should not apply. The court tossed aside the argument that the earlier dispute was arbitrated under a facultative certificate with an arbitration clause containing an honorable engagement provision as a distinguishing factor. The court also noted that the reinsurer was using defensive collateral estoppel (an affirmative defense to the cedent’s declaratory judgment action) and not offensive collateral estoppel. The court instead found that all the factors weighed in favor of applying collateral estoppel.
The final argument rejected by the court dealt with the lack of mutuality of estoppel. Here, the court found that the lack of mutuality did not preclude the reinsurer from asserting collateral estoppel.
Contract Interpretation and Aggregation
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 2024 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.
This decision focused 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. 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 expressed like this:
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 of 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.
Right of Inspection
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 underwriting or claims agents 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 contract. Some inspection clauses are 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 2024 Texas case, a reinsurer brought suit over its right of inspection of the cedent’s managing general agent’s (“MGA”) 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, an auditor had performed 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 it 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.
Late Notice
It has been a while since there has been a court opinion on the defense of late notice in a reinsurance dispute. In 2024, a Texas federal court had the pleasure of addressing the issue.
In United States Fire Insurance Co. v. Unified Life Insurance Co., No. 3:22-cv-00868-BT (N.D. Tex., Mar. 29, 2024, the cedent sought a reinsurance recovery after a class-action settlement. The reinsurer objected on late notice grounds. The reinsured product was short term medical insurance and the underlying dispute was a claim concerning the classification of medical benefits in such a way to deny payment. Ultimately, a class action was allowed and after a flurry of motions and an interlocutory appeal to the 9th Circuit, the parties settled.
The underlying action was commenced in April 2017 and notice of the claim was given to the reinsurer in December 2019. Settlement took place November 2021. The reinsurer rejected the claim and brought this declaratory judgment action alleging a late notice defense. Both parties moved for summary judgment. In granting the cedent’s motion for summary judgment and denying the reinsurer’s defense of late notice, the court found that timely notice was provided.
[The cedent] has established beyond peradventure all of the essential elements of its breach of contract counterclaim to warrant judgment in its favor. Also, there are no genuine disputes of material fact regarding [the reinsurer]’s late notice defense or its declaratory judgment claim. Thus, [the cedent] is entitled to summary judgment on its breach of contract and declaratory judgment counterclaims.
The key to any breach of contract dispute is the contract itself. Here, the notice provision in the reinsurance contract provided that the cedent:
shall . . . advise the Reinsurer promptly of all Claims which, in the opinion of [the cedent], may result in a Claim hereunder and of all subsequent developments thereto which, in the opinion of [the cedent], may materially affect the position of the Reinsurers.
The parties disputed whether the notice provision had an objective or subjective standard and whether “reasonableness” should be read into the reinsurance contract. As the court held:
Under the terms of the Reinsurance Treaty, [the cedent] has a duty to provide “prompt[]” notice once, ” in the opinion of [the cedent], ” the underlying lawsuit may result in a claim that would result in reinsurance liability. The notice provision conspicuously fails to include any modifier requiring that [the cedent]’s opinion must be “reasonable.” (citations omitted)
The court refused to insert the term “reasonable” into the notice clause based on Texas law of contract interpretation, and held that it was constrained by the contract’s express terms and the plain language chosen by the parties. Moreover, the court rejected the reinsurer’s claim that the notice provision provided the cedent with “unfettered” discretion and found that notice was required based on the cedent’ actual subjective opinion. That subjective standard found support in the evidence, which, according the court, demonstrated that the cedent did not believe that the underlying claim would result in reinsurance liability to the reinsurer in April 2017. That opinion did not change until the 9th Circuit denied the interlocutory appeal.
The court concluded that there was no genuine dispute and that the cedent had shown that it provided “prompt” notice to the reinsurer, which, “in the opinion of [the cedent],may result in a Claim [under the Reinsurance Treaty],” as required by the parties’ agreement.
The court then went on to address the notice prejudice issue that arises in late notice defenses. The court rejected the reinsurer’s claim that the cedent acted in bad faith in not providing notice and found that the reinsurer could not demonstrate actual prejudice. The court dismissed the reinsurer’s argument that it was prejudiced because it could not exercise its right to associate, which the court termed theoretical rather than actual prejudice. In other words, the reinsurer did not point to any evidence of tangible injury, but stressed only the mere possibility that if it had been notified earlier, its expert recommendations may have made a difference in the outcome. The court found that based on the record no reasonable jury could find that the reinsurer was actually, tangibly prejudiced on the basis that it contends.
The court concluded that the reinsurer owed a duty under the reinsurance treaty to indemnify the cedent for the reinsurer’s proportionate share of the underlying claim settlement and associated costs and fees.
Production of Reinsurance Information
Parties routinely seek reinsurance information in insurance coverage, bad faith and defense counsel legal malpractice cases and the courts routinely allow production of reinsurance information. This clear trend toward compelling discovery of reinsurance information continued in 2024.
In Clinic Reality, LLC. v. Lexington Insurance Co., No. 2:22-CV-05724 (W.D. La. Mar. 5, 2024), the court addressed two motions to compel document discovery and deposition questions by the policyholder in this coverage and bad faith action arising out of hurricane damages. Limiting the discussion to reinsurance, the policyholder sought production of information about reinsurance that might have been applicable to the policyholder’s claim. The policyholder also sought to question the insurer’s corporate witness about the applicability of reinsurance as well.
As to the documents/interrogatories, the insurer contended that there was no reinsurance applicable to the policyholder’s claims. The court ordered the insurer to formally amend its responses to indicate that there was no applicable reinsurance if it had not done so already. Otherwise, the court held that the information was relevant at least for discovery purposes and directed the insurer to produce the information without limitation on relevance or proportionality and to provide a privilege log for any redacted information. Thus, by formally amending its discovery responses the insurer would not be compelled that which did not exist.
As to the deposition, the court overruled the insurer’s objection to the deposition questions but limited the scope of questioning to reinsurance available for the policyholder’s claims. The court held that it was appropriate that the insurer should be able to produce a deponent who can answer these questions and related questions about reinsurance applicable for the policyholder’s claims.
As in the case of the documents and interrogatories, if the witness testifies that there is no applicable reinsurance to these claims, that should end the inquiry. Notably, in a ruling on the insurer’s motion in limine a month later, the court granted the motion on reinsurance noting that:
[The insurer] informs the Court that there is no reinsurance, facultative and/or treaty that applies to [the policyholder]’s Hurricane Laura and/or Delta claims. [The policyholder] agrees that [the insurer] has not produced any information about reinsurance but reserves its right to examine any reinsurance information should it be discovered.
In another 2024 case, a Delaware court granted access to a limited tranche of reinsurance information. In The CIGNA Group v. XL Specialty Insurance Co., No. N23C-03-009 SKR CCLD, Del. Sup. Ct., Jun. 27, 2024), a health insurer had a dispute with its excess carriers over its managed care errors and omissions coverage and sought to compel documents from the excess insurers, including communications with reinsurers about the interpretation and application of the disputed terms of the insurance contracts. As to the reinsurance communications, the court held as follows:
Here, [the insured] properly requested production of [the excess insurer]’s communications with its reinsurers about the interpretation and application of the disputed policy terms, “Claim” and “Wrongful Act.” To assuage [the insurer]’s concern about the breadth and relevance of the request, the Court will further tailor and limit the request to [the Department of Justice’s civil investigative demands]. These communications shed light on [the insurer]’s interpretation and application of the insurance policy language at issue in this case.
See also, Jackson Family Wines, Inc. v. Zurich Am. Ins. Co., No. 22-cv-07842-AMO (DMR) (N.D. Calif., Jul. 8, 2024) (where the court ordered the production of reinsurance communications in a bad faith case because they were relevant to the insurer’s state of mind and may bear on the coverage dispute); Selim v. Service Ins. Co., No. 22-cv-02086 (W.D. La., Sep. 9, 2024) (where the court ordered discovery of reinsurance information applicable to the underlying claims, but not other insureds or claims, plus a deposition, because “reinsurer supervision requirements may lead to discoverable information regarding [the insurer’s] defense of its claims adjustment”).
In coverage disputes, when a motion to dismiss is made, the movant may seek to stay discovery, including discovery of reinsurance information. In In The Matter of The Complaint of Gulf Inland Contractors, Inc., No. 22-2453 (E.D. La. Nov. 14, 2024), the court denied a stay of reinsurance discovery while a motion to dismiss was pending. The court held that no good cause existed to stay discovery and that:
The discovery sought by [the subrogee] is relevant to its claims against [the cedent’s] reinsurers under the Louisiana Direct Action Statute. The reinsurance agreements, depositions, and subpoena duces tecum are particularly relevant, as they may help establish whether [the cedent] or the reinsurers are potentially liable or have a financial responsibility for [the subrogee’s] claims.
Communications between an insurance carrier and its reinsurers may or may not be protected by privilege and may or may not be further protected by the common interest doctrine. The analysis is fact-specific, but important where reinsurance communications are sought in litigation. In 2024, a New York federal court upheld an insurer’s withholding of reinsurance communications based on both work-product privilege and the common interest doctrine.
In Gartner, Inc. v. HCC Specialty Underwriters, Inc., No. 20-CV-4855 (DEH), No. 22-CV-7000 (DEH) (S.D.N.Y. May 1, 2024), the court addressed a motion to compel production of 20 documents withheld by the insurer as privileged in a case involving insurance coverage for event cancellation due to COVID-19. The documents were produced to the court for in-camera review.
In finding in favor of the insurer (and denying the motion to compel), the court held that the work product doctrine applied to all of the documents. As the court described it, all of the documents post-dated the filing of the lawsuit and reflected mental impressions, opinions, and conclusions prepared in anticipation of or because of the litigation. Those mental impressions, held the court, are afforded absolute protection.
The parties seeking disclosure argued that the privilege was waived because of communications with the reinsurers, reinsurance broker and adjuster. In rejecting this argument, the court explained that the protection is waived only when work product is disclosed to a third party in a manner that is inconsistent with the purpose of the protection. Here, the court found that the insurer had shown that it shared a common legal interest with the reinsurers because they were subject to potential liability for a judgment or settlement entered into by the insurer. Second, the court found that the evidence demonstrated that the communications were made to formulate a common legal strategy. Accordingly, the court held that the work product privilege had not been waived.
In its opinion, the court succinctly laid out the test for determining if communications with reinsurers waived the privilege.
Courts have found that communications with “third-party reinsurers” can waive any work product protection, “unless there was a common interest privilege shared by the reinsurer and [the insurer].” (citation omitted). “[T]he interests of the . . . insurer and the reinsurer may be antagonistic in some respects and compatible in others. Thus a common interest cannot be assumed merely on the basis of the status [as a reinsurer].” (citation omitted). Instead, to show a common interest, the party claiming privilege and the third-party “must establish a common legal, rather than commercial interest.” (citation omitted). Then, after establishing that a common interest applies, the party claiming work-product protection must also show the communications “are made in the course of formulating a common legal strategy.” (citation omitted).
In another 2024 case, a party moving for summary judgment sought to seal documents in a variety of categories, including reinsurance-related documents. In Burnett v. CNO Financial Group, Inc., No. 1:18-cv-00200-JPH-KMB (S.D. IN. Jun. 24, 2024), plaintiffs brought a class action against a life insurer and related companies for breach of contract. Following a motion for summary judgment, plaintiffs moved to maintain certain documents under seal. The documents were filed by defendants, who supported the motion to maintain 13 of the exhibits under seal.
The relevant documents were communications with state regulators, actuarial memoranda, expert reports and communications regarding reinsurance agreements. The court denied the motion to keep these documents under seal. In denying the motion, the court concluded as follows:
There is a strong presumption in favor of open proceedings because the courts belong to the public. Sometimes exhibits must be sealed to protect the privacy interests of parties or other interested persons, and the party seeking to shield information from the public bears the burden of showing that its own privacy interests outweigh the public’s interest in open proceedings. The … Defendants … have not met that burden with respect to any of the filings they seek to seal in the pending motion. Their broad assertions of trade secret are not sufficient to show that any of the information contained in these exhibits—all of which are more than a decade old— should be kept sealed and out of the public’s view.
In denying the motion to keep the documents under seal the court made the following determinations. As to the communications with state regulatory officials, the court held that the defendants have neither shown that the exhibits fell within the scope of an Indiana insurance statute mandating confidentiality nor that making these exhibits public would harm their business competitiveness. As to the actuarial memos, the court held that defendants did not explain how the actuarial memos from 2007 and 2008 could harm their business competitiveness today. As to the expert reports, the court found that the briefing did not explain how unsealing the three expert reports at issue would harm their business competitiveness, nor did it address the argument that much of the allegedly confidential information in the expert reports was already publicly available on the SEC’s website. Finally, as to the reinsurance communications, the court held that defendants had not explained how any of the reinsurance information would be harmful to their business competitiveness or would otherwise prejudice them if it were to be made public. Instead, said the court, they summarily argued that reinsurance agreements generally contain sensitive information without discussing why the information in these specific emails should be sealed.
Focusing on the reinsurance information, court makes it clear that just saying that reinsurance agreements and communications contain sensitive business information without specifying why the information, if disclosed, would harm the company may not fly with the courts. In other words, if you want to protect confidential or proprietary information from public view, the argument has to be specific and not generic.
Jurisdiction
Chasing down reinsurance proceeds from non-US reinsurers is never easy. Multiple US cedents have had to bring proceedings to collect from a wide variety of non-US reinsurers from around the globe. Many of these reinsurers were or are arms of foreign governments and many have gone insolvent or have been privatized. Not surprisingly, some never appear in US proceedings and then seek to resist default judgments. In a 2024 case, a cedent obtained a default but was temporarily denied a default judgment because of issues with evidence of damages.
In National Indemnity Co. v. IRB Brasil Re, No. 8:23-CV-74 (D. Neb. Feb. 14, 2024), the cedent sought reinsurance recovery for $160 million in losses arising from policies issued to the State of Montana in 1973 and 1974. This reinsurer refused to pay and the cedent sued. Service was made through the Hague Convention and a default was entered when no answer was filed. The cedent sought a default judgment and then the reinsurer moved to quash service and vacate the default.
In rejecting the reinsurer’s motions, the court found that the reinsurer did not meet its burden to show that service of process was not made. The court rejected the reinsurer’s claim that it did not know about the proceedings and pointed to communications between the reinsurer’s counsel and cedent’s counsel trying to settle the dispute. The court also rejected the reinsurer’s evidence of technical deficiencies of service finding that the reinsurer’s own statements contradicted the reinsurer’s arguments.
Unfortunately, however, because of a slight disparity between the default judgment amount sought and the evidence presented, the court refused to issue the default judgment until the cedent thoroughly explained its damages calculation methodology.
In TIG Insurance Co. v. Republic of Argentina, 110 F.4th 221 (2024), the Fourth Circuit, in reversing the district court, concluded that exceptions to the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. § 1602 et seq. (“FISA”), applied, which allowed the cedent to continue its action to enforce a judgment against the government successor to the reinsurer based on default arbitration awards. The court ruled that arbitration exception to FISA applied (at least enough to go back to the district court for further proceedings), concluding “that an agreement is ‘made by’ a sovereign if it legally binds that sovereign to arbitrate with the party opposing the sovereign’s sovereign immunity.” The court stated that “[o]n remand, the district court must first consider what source of law governs the question of enforcement of the arbitration provision. That is because the precise legal test for whether (and how) a successorship theory can compel arbitration against a non-signatory can be different from one jurisdiction to another.”
The circuit court also held that the implicit waiver exception may apply, subject to further development by the district court. While difficult to enforce an arbitration judgment against a non-U.S. government-owned reinsurer, the court gave the cedent some runway to move forward.
Related to jurisdiction in standing. In Star Insurance Co. v. AT-SAF, Inc., No. 22-CV-7968 (EK)(TAM)(E.D.N.Y. Sep. 27, 2024), the court granted the defendant’s motion to dismiss a complaint for a declaratory judgment that the reinsurer had no obligation to defend or indemnify the insured filed by the reinsurer for lack of standing. In granting the motion, the court noted that no privity exists between a reinsurer and the original insured, and that the reinsurance relationship is one of indemnity where the ceding insurer is indemnified by the reinsurer against losses on the ceding insurer’s policies.
Because the reinsurer did not establish its status as a third-party beneficiary, did not prove that there was a cut-through clause in the reinsurance contract, failed to prove that there was an assignment or assumption, its lack of contractual privity precluded the reinsurer from pursuing its claims.
Collateral
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 2024 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 requiring that a 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.
Confirming an arbitration award is straightforward, but what about confirming an arbitration award in a yearly renewable term life reinsurance dispute even after the business is recaptured?
Commercial property insurance policies written in hurricane-prone jurisdictions often contain arbitration clauses. Can a policyholder avoid arbitration and bring breach of contract claims into court instead? Earlier this year, a Louisiana federal court said no.
The US Supreme Court has had a busy term deciding arbitration issues. In a second opinion in a matter of a week, the Court has addressed another arbitration issue that could affect insurance and reinsurance disputes. This time, the issue was conflicting contracts.
For some time, there has been a federal circuit split on whether a district court may dismiss a case where a dispute is subject to arbitration under section 3 of the Federal Arbitration Act (“FAA”) and one of the parties asks the court to stay the action pending arbitration rather than dismiss the proceeding. That question has now been answered by a unanimous Court.
