Texas Federal Court Allows Direct Action Against Reinsurer to Continue Under an Implied Agreement

Traditionally, a policyholder cannot sue a reinsurer without privity of contract or some exceptional circumstance. In a recent case, a Texas federal court denied a motion to dismiss the complaint filed by a policyholder against a reinsurer based on a finding that there was an implied agreement based on course of conduct.

In Indorama Ventures Holdings L.P. v. Factory Mutual Insurance Co., No. 1:24-cv-00404 (E.D. Tex. Aug. 7, 2025), the policyholder brought a breach of contract and declaratory judgment action to recover the full value of business interruption losses caused by an explosion. The policyholder had already recovered $50 million and was seeking an additional $50 million. The reinsurer moved to dismiss the complaint for failure to state a cause of action (no right to sue the reinsurer).

The facts indicate that the property and business interruption policy was issued by a captive insurer and reinsured by the reinsurer. But the reinsurer was the party who was obligated to adjust and pay any claims. In fact, the reinsurer adjusted and paid the first $50 million claim. The policy was originally issued to a third-party that the policyholder purchased, and the parties signed an insurance assignment agreement. That assignment agreement was agreed to by the reinsurer, which acknowledged its role in adjusting and paying claims directly to the policyholder.

Ultimately, the court denied the motion to dismiss the complaint. The court found that the reinsurance agreement was outside the complaint and did not need to be considered. But even if the reinsurance agreement was considered by the court, the complaint still stated a cause of action. Why, because of a Texas law.

The relevant law was Texas Insurance Code Ann. § 493.055, entitled “Limitation on the Rights Against Reinsurer,” which provides that:

A person does not have a right against a reinsurer that is not specifically stated in:
(1) the reinsurance contract; or
(2) a specific agreement between the reinsurer and the person.

As the court found, “[]he relevant ‘right’ in this case is [the policyholder’s] right to sue [the reinsurer] directly.” That right, held the court, did not exist under the reinsurance agreement.

First stop, § 493.055(1). The Reinsurance Agreement clearly forecloses [the policyholder’s] right to directly sue. A section entitled “B. Cooperation of the Company” cabins the rights created by the Reinsurance Agreement: “In no event shall anyone other than [the cedent] or, in the event of [the cedent’s] insolvency, its receiver, liquidator, or statutory successor, have any rights under this Agreement.” A separate section entitled “X. Exclusive Contract” similarly provides that “[i]n no event shall any party, other than [the cedent], or in the event of [the cedent’s] insolvency, its liquidator, have any rights against [the reinsurer] under this Reinsurance Agreement.”

But that was not the end of the inquiry. Under subsection (2) of the statute, if there is a “specific agreement” between the reinsurer and the policyholder, then a direct action is possible. Ultimately, the court determined that a specific agreement existed based on course of conduct. The court’s rationale was based on its view that the Texas Supreme Court would find that an “agreement” included an agreement based on course of conduct and that the facts pled, including certain adjustment communications attached to the motion, and the insurance assignment agreement, demonstrated course of conduct leading to an agreement between the reinsurer and the policyholder that the reinsurer would adjust and pay claims under the property policy.

In denying the motion to dismiss, the court held that the policyholder has sufficiently pled a right to sue the reinsurer directly based on an implied agreement outside the reinsurance agreement.

This could not have been a shock to the reinsurer given the insurance assignment agreement and its role in adjusting and paying the claims. But as the court stated, there are some factual issues and those will come out in summary judgment or trial if the case gets that far (which it might given the $50 million claim).

Is Self-Insurance, Insurance?

Joint insurance funds provide coverage to members and often purchase reinsurance to protect the fund. In a recent case, an issue arose concerning competing insurance policies and coverage provided by a joint insurance fund covering a loss and whether the fund’s purchase of reinsurance triggered the “other insurance” clause in the competing insurer’s policy making the fund the primary insurer.

In National Union Fire Insurance Company of Pittsburg v. Somerset County Joint Insurance Fund, No. 24-196 (ZNQ)(JBD) (D. N.J. Jan. 6, 2025), a joint insurance fund and an auto and excess carrier disputed which policies were primary and which were excess after settling a catastrophic loss. The fund had purchased reinsurance, which reduced its $5 million limit down to $250,000. All policies had “other insurance” clauses. The question was whether the carrier’s “other insurance” clause applied because the fund provided “insurance,” which would make the carrier’s policy excess of the fund’s coverage.

The excess carrier sought discovery of the reinsurance coverage purchased by the fund to demonstrate that the reinsurance policy triggered the “other insurance” clause and that the fund’s exposure over its retention was not self-insurance but was “insurance” because of the reinsurance policy.

In denying the discovery request, the court held that the governing statute and an opinion of the New Jersey Supreme Court made it clear that the discovery sought was not relevant because even when a joint insurance fund obtains reinsurance, it does not convert to providing “insurance,” but continues to allow its members to self-insure. The court also found that the discovery requested was not proportional to the needs of the case given that the carrier had the reinsurance contract and the fund was willing to make a witness available to discuss its risk management plan and operations. The court noted that nothing in its discovery determination precluded the carrier from making its arguments on a substantive motion in the future.

New York’s Highest Court Rules Direct Physical Loss or Damage Requires Material Alteration or Complete and Persistent Dispossession

The New York Court of Appeals (New York’s highest court for those expecting it to be the supreme court) has finally weighed in on the COVID-19 question of what direct physical loss or damage means in a property policy providing business interruption coverage. Not surprisingly, New York joins the vast majority of state and federal courts and affirmed the order below dismissing the complaint.

Continue reading →

The Meaning of Broadcasting and Its Application to a Media Exclusion

Click Here for Podcast

When is broadcasting broadcasting as opposed to transmission? And is there a difference? That was the question before the court on an appeal from a judgment that an insurer did not have to defend its insured in a copyright infringement suit. The question was pertinent because of a media exclusion in the policy.

Continue reading →

Insurance Coverage Only Goes So Far

Photo by Matthis Volquardsen on Pexels.com

Click Here for Podcast

It should be pretty obvious that you only get the insurance you ask and pay for. Yet, sometimes coverage is sought well beyond the scope of the policy. In a recent case, the court made short work of the issue, but nevertheless the case went all the way to an appeals court even though it was obvious there was no coverage.

Continue reading →

Insured vs Insured Exclusion Precludes Coverage

Click Here for Podcast

In many insurance policies, particularly directors and officers liability policies, coverage is precluded if one insured brings a claim against another insured. But what happens if one of the named plaintiffs is not an insured party? A recent Sixth Circuit Court of Appeals case addresses this issue.

Continue reading →

Weapons Exclusion Precludes Coverage

Click Here for Podcast

Courts are tough on exclusions but when an exclusion is clear it will preclude coverage. In a recent case, an exclusion for bodily injury arising out of weapons resulted in a coverage case being dismissed

Continue reading →

Brokers and Insurers Prevail in COVID-19 Coverage Action

There is no question that the COVID-19 restrictions imposed by local and state governments have had an unintentional but devastating effect on businesses both large, medium and especially small. Restaurants, movie theaters, live entertainment, sports. gyms, salons and many other businesses have closed because of the lack of business. While many of these businesses purchased insurance with coverages for business income and extra expense, the lack of direct physical loss of or damage to property has meant that these policies, for the most part, do not cover the loss of business caused by the government shut-down orders.

Continue reading →

Broad Policy Endorsement Dooms Motion to Dismiss in COVID-19 Case

COVID-19 business interruption rulings periodically have interesting quirks worth discussing. While the majority of cases are being dismissed at the pleading stage, some are not for various reasons. In a recent Ohio state court case, the motion to dismiss on the pleadings was denied in major part because of an endorsement expanding coverage in a business property policy for a restaurant.

Continue reading →

While the COVID-19 Dismissals Pile Up, the Allegations May Matter

It’s been since September that I have blogged about business income and extra expense and civil authority order insurance coverage for COVID-19 closures and the multiple court cases addressing motions to dismiss. That’s because the cases have been coming down by the dozen, mostly, but not always, on the side of the insurance carrier.

In one of the recent cases, another motion to dismiss the complaint granted with prejudice in favor of the insurer, the court’s analysis was extremely thorough and persuasive. But what struck me most was the court’s commentary on the differences chosen by policyholder counsel in articulating the allegations in the complaint. Those differences are obvious and, although I have not done a statistical analysis, it appears those differences often account for the reasons why some courts have not dismissed these COVID-19 cases. What do you think?

Continue reading →

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: