In 2025, the courts issued some significant arbitration decisions in non-reinsurance cases that have potential applicability to reinsurance disputes. Additionally, decisions were handed down concerning the defense of late notice, the use of collateral estoppel direct actions against reinsurers, disclosure of reinsurance information and funding of collateral.
Arbitration
In the non-reinsurance context, significant decisions were rendered in 2025 concerning reverse preemption and manifest disregard as a ground for vacatur of an arbitration award.
Arbitrability and Motions to Compel Arbitration
For decades, those seeking to enforce arbitration clauses in insurance and reinsurance policies have, in certain states, faced a major obstacle: reverse preemption. Reverse preemption occurs when a state law precluding arbitration clauses in insurance policies overrides — or reverse preempts — 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 was reversed in 2025.
In Certain Underwriters at Lloyd’s, London v. 3131 Veterans Blvd LLC, 136 F.4th 404 (2d Cir. 2025), a surplus lines insurer issued policies to two insureds with identical arbitration clauses. The insureds sued the insurer in Louisiana state court over hurricane losses and the insurers sued in New York federal court to compel arbitration under Chapter 2 of the Federal Arbitration Act (“FAA”) 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 had been fatally undermined by the Court’s holding in Medellin v. Texas, 522 U.S. 491 (2008). The court found that Stephens had been abrogated to the extent that it held that Article II, section 3 of the New York Convention was not self-executing. Because the court held that under the Medellin test Article 11, Section 3 of the New York Convention is self-executing, the Convention could not 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 should not override the policy in favor of international commercial arbitration.
Petitions to Confirm or Vacate Arbitral Awards
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 2025, the Fifth Circuit Court of Appeals in a non-reinsurance case 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 raising manifest disregard of the law.
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 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. The court noted that manifest disregard was not one of the statutorily enumerated grounds for vacatur and stated 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).”
Issue Preclusion/Collateral Estoppel of Arbitration Awards
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.
Here, the ceding insurer had a 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. The court found that all the elements of collateral estoppel or issue preclusion applied and rejected the ceding insurer’s arguments to the contrary. 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.
Securities Fraud
In 2025, 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, 2025 WL 2406864 (3d Cir. 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.
As the court found, 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.
The critical question the court addressed was whether the omitted historical loss data was material. 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. The court reversed summary judgment and allowed discovery to proceed at the district court level.
Late Notice
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 found in 2025, 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.
The court held 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.
Production of Reinsurance Information
Policyholders and claimants seeking to access reinsurance contracts and other reinsurance information and communications to support their claims continued to take up judicial time in 2025. Courts are split on the issues, but the issues are all fact-dependent and may result in disclosure being narrowed to fit the facts.
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 to communications between the insurer and the reinsurers/retrocessionaires concerning the cyber claim, the insured’s policy or any reinsurance contract providing coverage for the cyber claim.
Jurisdiction/Direct Right of Action
Traditionally, a policyholder cannot sue a reinsurer without privity of contract or some exceptional circumstance.
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 under Texas law. Under Texas Insurance Code Ann. § 493.055, entitled “Limitation on the Rights Against Reinsurer,” 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. 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.
Collateral
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 went unheeded.
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).
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.
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.
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?
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? A Michigan federal court recently addressed this issue.
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 confidentiality agreement in the proceeding 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 2023, arbitrability and who must arbitrate continued to be litigated issues, with courts often sending the parties to arbitration consistent with public policy. Courts also addressed arbitrator bias, allocation, discovery of reinsurance information issues, jurisdiction, and direct right of action. And in one case, the court addressed a lost policy issue.
IRMI.com has published my latest Expert Commentary on Reinsurance. This commentary focuses on the preclusive effect of a prior arbitration award and who gets to decide whether the prior arbitration award in a reinsurance dispute has any preclusive effect on a subsequent dispute. You can read the commentary here.
In 2022, arbitration issues continued to arise, with the courts enforcing the right to arbitrate and leaving much of the decision making to arbitration panels. Courts also continued to avoid non-existent presumptions and, instead, focused on the words of the contract to reach decisions on contract limits and following issues. And courts continued to allow for the discovery of reinsurance information.
Arbitration
Most reinsurance arbitrations fall under the Federal Arbitration Act (“FAA”). In the reinsurance context, questions of arbitrability and the powers of the arbitrators arise often. In 2022, courts continued the trend to exercise their authority to compel arbitration and leave many questions of arbitrability to the arbitrators. The courts also enforced arbitral subpoenas, a crucial element to compelling testimony at arbitration.
Arbitrability and Motions to Compel Arbitration
Enforcing arbitration rights is complicated when the contracts with an arbitration clause are assigned or where a receiver is involved. Who has the right to compel arbitration and was the arbitration demand properly served are questions that arise.
In Darag Deutchland AG v. Logo, LLC, No. 654800/2021 (N.Y. Sup. Ct., N.Y. Co., Mar. 3, 2022), a dispute arose over reinsurance recoverables from retrocessional agreements. The petitioner acquired the liabilities of a retrocessionaire from a defunct company that obtained the liabilities through a loss portfolio transfer. The respondent acquired the claim from the liquidator of the retrocedent. The retrocedent’s successor demanded arbitration against the retrocessionaire’s successor. The retrocessionaire’s successor claimed that there was no arbitration agreement between the successors and that service of the arbitration demand was ineffective.
In ruling in favor of arbitration (and the retrocedent’s successor) in a cryptic decision, the court found that service of the arbitration demand by registered mail was effective when the postal authorities first attempted to deliver the mail and that New York favors and encourages arbitration.
In certain relationships, a non-signatory to a contract with an arbitration clause may be compelled to arbitrate because of the benefits the non-signatory gained from the contract. In Travelers Indemnity Co. v. Alto Independent School District, No. 3:21CV00909(SALM) (D. Ct, Jul. 28, 2022), several school districts were insured by an educational risk management cooperative. The cooperative was reinsured, in part, by the reinsurer through a facultative certificate. The facultative certificate contained an arbitration clause. It also allowed the reinsurer to assume the duty to investigate and defend claims after claims exceeded the retentions set forth in the declarations.
The insured school districts sued both the risk management cooperative and the reinsurer when property claims were allegedly not paid in full. In response to the lawsuit, the reinsurer moved to compel arbitration.
Although the insured school districts were not signatories to the facultative certificate, the cedent nonetheless argued that the insureds were bound to arbitrate because they directly benefited from the facultative certificate, i.e., direct benefits estoppel. The court analyzed the theory of direct benefits estoppel in detail and ultimately rejected the argument.
In dismissing the cedent’s complaint, the court relied on a Texas appellate court decision in the related Texas actions that held one of the school districts was not bound by the facultative certificate’s arbitration provision. But the court went further and explained why direct benefits estoppel did not apply.
The court conceded that the reinsurer’s claims handling obligations arose from the facultative certificate, but pointed out that “the mere fact that [the reinsurer’s] duty to perform such obligations only came to be because of the Facultative Certificate is insufficient to invoke direct-benefits estoppel.” Moreover, the court found that the reinsurer’s alleged liability did not arise solely from the facultative certificate. The reinsurer’s liability was instead “premised on insurance code, tort, and DTPA duties that are general, noncontract obligations.” The court concluded that “[i]n sum, [the reinsurer] has failed to establish that direct-benefits estoppel applies because it has not shown that [the insureds’] claims ‘arise[] solely from the contract or must be determined by reference to it[.]'”
Powers of the Arbitration Panel
Who decides whether a contractual time limitation in a reinsurance contract on when arbitration can be brought applies to bar arbitration? In Alliance Health & Life Insurance Co. v. American National Insurance Co., No. 21-2995 (6th Cir. Jul. 22, 2022) (Not Recommended for Publication), the cedent sued the reinsurer for breach of their Medical Excess Reinsurance Agreement. The reinsurer moved to compel arbitration and to dismiss. The parties disputed whether a three-year limitation in the reinsurance agreement on commencing arbitration precluded arbitration. The district court dismissed the complaint after holding that the question was for the arbitrator in the first instance. The Sixth Circuit affirmed.
In affirming, the circuit court addressed the issue of arbitrability and discussed the federal case law on the distinction between substantive and procedural questions of arbitrability. The court noted that time limitations have been considered procedural and therefore for the arbitrator to decide.
As to the cedent’s arguments, the court stated that “[b]ecause [the cedent] fails to appreciate the distinction between substantive and procedural questions of arbitrability, its arguments as to who decides miss the mark.” The court rejected the cedent’s claim that the arbitration clause was narrow, noting that “the clause covers ‘any dispute . . . with reference to the interpretation of this Agreement or their rights with respect to any transaction involved.'” Thus, the court held, this encompassed “the determination of whether the contractual time limit precludes arbitration.”
As most courts have decided, procedural issues, such as time limitations, are for the arbitrator to decide and not the courts. That trend continued in 2022.
Arbitrators have the power to issue subpoenas when necessary. Those subpoenas may be enforced in court. In reinsurance arbitrations, subpoenas are issued relatively rarely, but they do happen.
In Symetra Life Insurance Co. v. Administrative Systems Research Corp., International, No. 21-2742 (6th Cir. Nov. 7, 2022)(Not Recommended for Publication), the district court granted the cedent’s petition to compel compliance with an arbitral subpoena. The subpoena was issued by an arbitration panel in a reinsurance dispute concerning allegations of breach of an employee benefits plan reinsurance agreement when the reinsurer failed to indemnify the cedent for a settlement between it and a dialysis provider.
The subpoena compelled the custodian of records of the third-party administrator (“TPA”) of two of the employee benefit plans to appear with documents before an arbitration hearing in Michigan. The TPA was affiliated with the reinsurer. The TPA moved to quash the subpoena before the arbitration panel and the panel denied the motion and issued the subpoena.
The cedent petitioned the Michigan federal court to compel the third-party administrator to comply with the subpoena. The Magistrate Judge ruled that the arbitration panel was sitting in Michigan and ordered compliance even though the cedent had argued in an earlier proceeding that the arbitration panel would only ever sit in Washington. The district court agreed with the Magistrate Judge and issued judgment enforcing the subpoena.
On appeal, the TPA raised many issues, which the court rejected. These included a challenge to the court’s subject matter jurisdiction (“Because it does not appear to “a legal certainty” that the subpoenaed documents’ value is $75,000 or less, we find that the district court had subject matter jurisdiction”), standard of review by the district court (“Because this analysis would be proper under either the “clearly erroneous or contrary to law” standard or the de novo standard, we see no reason to remand the case”), where the arbitration panel sits, judicial and collateral estoppel (changed circumstances), compliance with Section 7 of the FAA (“Under a straightforward reading of the statute’s text, the subpoena was a proper exercise of the panel’s section 7 powers”), and materiality (materiality should be left for the arbitration panel).
Where the arbitration panel is sitting is an issue that often gets raised in resisting an arbitral subpoena. In an earlier proceeding, the cedent argued that the panel could only sit in Washington because the reinsurance contract named Washington the seat of arbitration. But it turned out that the venue for arbitration was disputed and that main hearing ended up being set in Texas. The court rejected the TPA’s argument that Section 7 of the FAA meant that the panel may sit in only one location, the site of the final hearing. The court held that “the FAA’s text contains no such restriction, and we decline [the TPA]’s invitation to read additional terms into the statute.” The court also noted that the arbitration panel declared that it was sitting in Michigan for the hearing on the subpoena.
Preclusive Effect of a Prior Arbitration Award
In White Rock Insurance Co. PCC Limited v. Lloyd’s Syndicate 4242, No. 15309-15309A (N.Y. App. Div. 1st Dep’t, Feb. 15, 2022), the appellate court affirmed the motion court’s ruling that the reinsurer’s complaint was precluded by the parties’ prior arbitration award. The court found that merely because a related trust agreement did not have an arbitration clause did not mean that a different result was required.
The court ruled that the broad arbitration clause in the reinsurance contract, which provided that “[a]ll disputes and differences arising under or in connection with this Contract shall be referred to arbitration,” was sufficient to bring in the terms of the trust agreement. As the court held, “h]ere, there is a reasonable relationship between the reinsurance contract and White Rock’s argument that its liability under that contract is limited to the amount in the trust account.”
As it did before the motion court, the reinsurer argued that the trust agreement was not before the arbitration panel. The court rejected this argument and found that “plaintiff’s conduct during the arbitration made clear that it acquiesced to the panel’s consideration of the trust agreement, as it submitted evidence regarding the trust agreement and argued that the contracts at issue, as well as the parties’ commercial relationship, included the trust agreement.” Ultimately, the court held that “the claims in the arbitration are part of the same transaction as the claims in this action.”
This decision continues the trend of courts holding that broad arbitration clauses will incorporate related transactional documents even if those related documents do not have arbitration clauses themselves, especially where issues under the related documents are brought before the arbitration panel.
Follow-the-Settlements/Follow-the-Fortunes
Courts have long held that a cedent’s settlement allocation decisions fall within the follow-the-fortunes/follow-the-settlements doctrines. In Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 20-4282 (2d Cir. Sep. 15, 2022), the Second Circuit addressed an appeal of a grant of summary judgment to the cedent, which compelled the reinsurer to follow the settlements of the cedent in its allocation and cession of asbestos settlements. The key issue was whether the exhaustion of underlying excess policies by actual payments was required by the reinsured excess policy and the reinsurance contract.
In affirming the district court, the Second Circuit spent considerable time discussing whether exhaustion by actual payment of the underlying excess policies was required. The court agreed with the district court and found that the ambiguity in the language, which did not expressly require exhaustion by actual payment of losses, meant that the exhaustion requirement could be satisfied by a below-limits settlement of the underlying policies.
On the follow-the-settlements issue, the circuit court relied on its precedents and set forth the well-known aspects of the doctrine. Where, as here, the reinsurance contract contains a “follow-the-settlements” clause, the reinsurer must indemnify there insured for the settled claim “as long as the settlement decision `is in good faith, reasonable, and within the terms of the applicable policies.'” The follow-the-settlements principle applies also “to a cedent’s post-settlement allocation decisions, . . . as long as the allocation meets the typical follow-the-settlements requirements.” Importantly, a follow-the-settlements provision “does not alter the terms or override the language” of the policies at issue. Instead, “it simply requires payment where the cedent’s good-faith payment is at least arguably within the scope of the insurance coverage that was reinsured.” (citations omitted).
The court held that the reinsurance contract’s attachment point was not contingent upon payment by the underlying insurers. The court concluded that “[t]he parties could have agreed to reinsurance coverage that was far narrower in scope than the excess policy itself, but we find no suggestion in the text of the reinsurance contract that they intended to do so here.” “Because [the cedent] has adequately supported its position that [its insured’s] covered losses exceeded the attachment point of the reinsurance policy, we conclude that the portion of the settlement allocated to Policy 3 is covered by the reinsurance policy.”
But where there is no express following clause or the recovery sought is beyond the scope of coverage, courts will have no problem denying a cedent’s claim.
In Public Risk Management of Florida v. Munich Reinsurance America, Inc., No. 21-11774 (11th Cir. Jun. 29, 2022), an insurer of public entities sought reinsurance coverage for an underlying claim involving a Section 1983 claim that the local government interfered with a property owner’s rights by allowing beach access through the property owner’s property. The circuit court affirmed summary judgment granted to the reinsurer.
The cedent claimed that there was an express follow-the-fortunes clause and, even if there was none, the court should infer the follow-the-fortunes doctrine and compel the reinsurer to follow the cedent’s good faith settlement. In rejecting the cedent’s arguments, the court held that there was no express follow-the-fortunes clause and, in fact, the language of the reinsurance contract precluded the follow-the-fortunes concept.
The court also rejected the cedent’s argument that the doctrine should be implied by inference. While the court did not reach the issue of whether the doctrine could ever be inferred under the right circumstances, it declined to infer the application of the follow-the-fortunes doctrine under the circumstances of this case and in particular because of the specific language inconsistent with the application of the doctrine.
The court’s analysis and holding is consistent with recent trend where courts focus on the specific language of the contract and not on presumptions and inferences.
In Utica Mutual Insurance Co. v. Abeille General Insurance Co., 2022 NY Slip Op 03815 (N.Y. App. 4th Dep’t Jun. 10, 2022), the cedent sought reinsurance recoveries for defense costs paid under umbrella policies for underlying asbestos settlements where the primary policies had been exhausted. The reinsurance contracts covering the umbrella policies had express follow-the-settlements provisions. The reinsurers denied the claims stating that defenses costs were not covered under the umbrella policies and the reinsurance contract.
Both sides moved for partial summary judgment and the motion court denied both motions. Each side appealed. The appeals court modified the order and granted the reinsurers’ motion, holding that there was no coverage for defense costs under the umbrella policies and the reinsurance contracts.
On the merits, the court concluded that the motion court properly determined that the reinsurers established that its interpretation of the umbrella policies, i.e., that those policies did not cover defense costs in the underlying actions because those costs were covered by the primary insurance policies, is the only fair construction of those policies. The court held that “the unambiguous terms of the umbrella policies establish that [reinsurers] were not required to reimburse [cedent] under the reinsurance contracts for the disputed defense costs related to the underlying actions.”
On the follow-the-settlements argument, the court agreed with the reinsurers that, contrary to the motion court’s determination, the follow-the-settlements doctrine did not alter the analysis above. There was no dispute that the reinsurance contracts contained an express follow-the-settlements clause. The court explained the way the follow-the-settlement clause mandates the reinsurers to follow the good faith claims determinations of the cedent. But, as the court stated, there are limitations to the doctrine.
The follow-the-settlements doctrine “insulates a reinsured’s liability determinations from challenge by a reinsurer unless they are fraudulent, in bad faith, or the payments are clearly beyond the scope of the original policy or in excess of [the reinsurer’s] agreed-to exposure” (citations omitted). The court concluded that in this case, “the reimbursement sought by [cedent} from [reinsurers] was beyond the scope of coverage in the umbrella policies and, thus, the follow-the-settlements doctrine does not apply under the circumstances.” A neat and clean analysis based on the plain reading of the relevant contracts, which contrasts with the prior trend of reading presumptions into reinsurance contracts.
Discovery and Sealing
Production of Reinsurance Information
Parties routinely seek reinsurance information in insurance coverage cases and the courts routinely allow production of reinsurance information. Two cases in 2022 continued the trend of requiring production of reinsurance information.
In Williams International Co., LCC v. Zurich American Insurance Co., No. 4:20-cv-13277 (E.D. Mich. Mar. 7, 2022), the policyholder moved to compel production of reinsurance agreements. In granting the motion in part, the court held that the reinsurance agreements were covered by Federal Rule of Civil Procedure 26(a)(1)(A)(iv) and should have been produced as part of the insurance company’s initial disclosures (requiring 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.” The court noted that the rule is absolute and no showing of relevance is necessary. Accordingly, the court ordered the insurance company to produce any reinsurance agreement, whether treaty or facultative, along with any declarations sheets.
Not all was lost for the insurance company, however. The policyholder’s request for “[a]ll documents [and/or] communications concerning” the reinsurance was rejected on vagueness, relevance and ambiguity grounds. In other words, you can ask for relevant reinsurance agreements but if you ask for other documents the request must be more specific and relevant to the underlying dispute.
In Computer Sciences Corp. v. Endurance Risk Solutions Insurance Co., No. 1:20-cv-01580-MKV (S.D.N.Y. Mar. 10, 2022), the court ruled, among other things, that the insurance company’s communications with its reinsurers about the disputed claim were relevant and must be produced. Notably, the policyholder asked for the reinsurance agreements, which the insurer said had no relevance where there was no issue as to the insurer’s ability to satisfy any judgment. The court focused instead on reinsurance communications involving the disputed claim and ordered those communications produced.
These cases are part of a continuing trend where the courts have allowed reinsurance information to be produced in insurance coverage disputes.
Sealing
Whether courts will seal reinsurance arbitration documents when the parties come to court for judicial relief has been a significant topic for several years. Most courts refuse to seal arbitration information when motions to vacate or confirm an arbitration award are made. But that is not always the case.
In Washington Schools Risk Management Pool v. American Re-Insurance Co., No. C-21-0874-LK (W.D. Wash., Apr. 20, 2022), a Magistrate Judge was asked to seal materials filed with reply papers on applications to declare that the arbitration clause was inapplicable to the dispute and to compel arbitration. The court granted the motion largely relying on the reinsurer’s representation-which was not controverted by the cedent-that the parties would enter into a confidentiality order/agreement in the form of the ARIAS-U.S. model and, therefore, sealing the materials in the reply papers was appropriate.
Even though neither party had yet signed a confidentiality agreement, the reinsurer told the court-again unopposed-that “there appears to be a substantial likelihood that they (and the Arbitration Panel) ultimately will execute the ARIAS-US Form, `as is’ or as modified in response to revisions to be proposed by [the pool].” Accordingly, the reinsurer argued that the arbitration panel may require the parties to go back to court to ask that these arbitration materials be sealed.
The court took it on faith that some form of the ARIAS-U.S. confidentiality agreement will apply to the arbitration requiring the parties to ask the court to seal any arbitration material submitted to the court. Given the lack of opposition to the motion by the cedent, the strong likelihood that the ARIAS-U.S. form would be used and that the form requires arbitration information to be sealed, the court found that sealing the reply materials was warranted.
Direct Right of Action
To sustain a claim against reinsurers there must be a contractual relationship between the party making the claim and the reinsurers. That is the prevailing rule in all jurisdictions, subject to rare exceptions. Nevertheless, policyholders, when left without a recovery from their insurer, will try to make out a claim directly against their insurer’s reinsurers.
In 2022, in a complicated credit insurance/reinsurance transaction involving a special purpose vehicle, a policyholder left without an insurance recovery tried again to recover its loss from its insurer’s reinsurers. Unfortunately for the policyholder, the trend in denying a direct claim by a policyholder against a reinsurer continued.
In Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC LLC, 31 F.4th 800 (D.C. Cir. 2022), a finance company obtained credit insurance through a special purpose vehicle, which in turn obtained reinsurance from several reinsurers. The finance company issued a loan and ultimately the borrower defaulted. The finance company sought recovery under the special purpose vehicle and the parties arbitrated the claim. The finance company prevailed in arbitration but the special purpose vehicle did not have the assets to pay the award and the reinsurers all disclaimed under the terms of the reinsurance agreements.
The finance company sued the special purpose vehicle, the reinsurers and the brokers in federal court seeking, among other things, a direct recovery from the reinsurers. The district court dismissed the finance company’s breach of contract and declaratory judgment claims and ultimately granted summary judgment to the reinsurers (and the brokers).
On appeal, the circuit court affirmed the district court’s dismissal of the finance company’s breach of contract and declaratory judgment claims because, as the district court concluded, the finance company failed to plead facts sufficient to show a contractual relationship with the reinsurers. As the court found, the reinsurance agreements created no contractual relationship with the finance company. Instead, the agreements were “solely between [ART] and the Reinsurer[s]” and “nothing contained in th[e] Agreement[s] shall create any obligations or establish any rights against the Reinsurer[s] in favor of any person or entity not a party hereto.”
The court rejected the finance company’s attempt to analogize these facts with those in cases where a direct relationship was alleged. The court also affirmed the district court’s grant of summary judgment on the remaining allegations, finding that there was no evidence to support the finding of an implied contract. In fact, the only evidence of consideration being exchanged was between the finance company and the special purpose vehicle and the separate exchange between the special purpose vehicle and the reinsurers. The lack of evidentiary support for any of its claims doomed the finance company’s appeal.
Legacy Claims
It is quite common to have a transaction where a company essentially takes over another company and reinsures its obligations 100%. Several years later, the acquiring reinsurer may sell the acquired ceding company as a “clean shell.” Of course, the new acquiring company buying the shell wants the original 100% reinsurance agreement to remain in force. After 10 years or more, sometimes things go awry.
In Sparta Insurance Co. v. Pennsylvania General Insurance Co., No. 21-11205-FDS (D. Mass. Aug. 9, 2022), the acquirer of a supposed “clean shell” sought a declaratory judgment in federal court against the seller when, allegedly, after ten years or more, legacy claims against the “shell company” that were supposedly 100% reinsured by the shell’s seller were not being administered or paid.
In analyzing whether the complaint was sufficient to withstand a motion to dismiss, the court stated that “[w]hile it is far from clear, it appears that the complaint thus alleges that claims are not being administered or paid on a wholesale basis in violation of the SPA and the reinsurance agreement. In other words, it appears to allege that claims are not being declined on an individualized basis, according to individualized coverage determinations, but that all claims are being declined, regardless of the underlying issues.” The seller’s argument focused on the lack of individualized claims being denied as injuries to the buyer. The court made it clear that the allegations of the wholesale lack of claims administration and payment is sufficient to survive the motion to dismiss.
Ultimately, the court denied the seller’s motion to dismiss and allowed the buyer’s case to move forward. But the court noted that “[w]hile additional facts and details will surely be critical to resolve a motion for summary judgment, ‘their absence does not support a motion to dismiss'” (citations omitted).
Legacy reinsurance liabilities against certain non-US reinsurers that have gone into insolvency or have been absorbed by non-US governments remain an issue for many US ceding companies. Some US ceding companies have fought long and hard to win arbitrations, enter judgments and then try to enforce those judgments against the non-US reinsurers or their governments. Success in doing this has been up and down.
In TIG Insurance Co. v. Republic of Argentina, No. 18-mc-00129 (DLF) (D. D.C. Aug. 23, 2022), the cedent moved for a writ of attachment against a building in Washington, D.C. owned by Argentina in an effort to enforce two judgments. The first was against the now defunct Caja Nacional de Ahorro y Segurro, a state-owned reinsurer in Argentina. The second judgment was against Argentina directly. Both were default judgments. Obviously, Argentina objected and sought to preclude the writ of attachment.
In deciding in favor of Argentina, the court ultimately concluded that Argentina did not waive sovereign immunity and vacated the judgment against Argentina because the issuing court did not have jurisdiction to enter the judgment. The court noted that “[s]imply agreeing to handle Caja’s claims and litigation, without any indication of how, provided no guidance on Argentina’s subjective intent to subject itself to arbitration or to U.S. law.” This is important because if a foreign government that has taken over a reinsurance company agrees to be bound by the arbitration clause in a US-based reinsurance agreement, then it will likely have waived its sovereign immunity and a judgment like the cedent had in this case could be enforced (assuming there is something in the US to enforce it against).
Tortious Interference
With the proliferation of runoff companies, which either take over distressed reinsurers or absorb legacy reinsurance obligations, comes claims by insureds and cedents against those companies and their affiliated administrators for various alleged offenses. For example, claims of tortious interference with contract have been brought against several runoff entities and their affiliates.
In Stonegate Insurance Co. v. Enstar (US) Inc., No. 21 C 3523, N.D. Ill. Oct. 18, 2022), the court heard, for the second time, a motion to dismiss a tortious interference with contract claim brought by a cedent against an acquired reinsurer’s affiliated companies. Essentially, the cedent claimed that the affiliates directed the reinsurer to breach its contracts with the cedent and delay payments and apply improper offsets. The dispute with the reinsurer was sent to arbitration and this case was only against the affiliates.
In dismissing the tortious interference claim for the second, and final, time, the court noted that “Illinois also recognizes a conditional privilege in tortious-interference claims where a defendant acts ‘to protect an interest which the law deems to be of equal or greater value than the plaintiff’s contractual rights'” (citations omitted). In other words, under Illinois law, “[a] defendant-agent is conditionally privileged to interfere with its principal’s contracts.” This is the rub in bringing these cases against these affiliated entities that manage the legacy reinsurance obligations.
To overcome this conditional privilege, which the court already found existed because of the relationships between the affiliates and the reinsurer, the cedent bore the burden to plead and prove that the affiliates’ conduct was malicious or unjustified. The court held that it was not. In dismissing the complaint, the court concluded that ” [the cedent’s] tortious-interference claim against Defendants [ ] is, at heart, simply repackaged breach-of-contract claims against [the reinsurer].
