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.

Louisiana Federal Court Sort of Grants Reinsurance Discovery in Hurricane Loss Coverage and Bad Faith Action

Policyholders regularly ask for discovery of reinsurance information. Courts are regularly allowing it, but there are limitations as you will see from this Louisiana federal court decision from earlier in 2024.

Continue reading →

Common Interest Doctrine Prevails in Disclosure Dispute

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 a recent case, a New York federal court upheld an insurer’s withholding of reinsurance communications based on both work-product privilege and the common interest doctrine.

Continue reading →

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 →

Court Appoints Umpire in Coverage Dispute

Many arbitration clauses, especially those that reference arbitration rules, provide for a party to go to the court where there is an impasse in appointing the arbitrator or umpire. In a case decided earlier in 2023, an insurance coverage dispute subject to arbitration landed in court to resolve a dispute over selection of the umpire.

Continue reading →

Ninth Circuit Court of Appeals Certifies COVID-19 Question to the California Supreme Court

While insurers have been successful in dismissing most COVID-19 property damage claims, especially in federal court, many of the coverage issues that arise in federal court actions are resolved based on state law. When a federal court finds that resolution of a dispute is governed by state law and that there is no controlling state law precedent, the court may certify the state law question to that state’s supreme court for resolution.

Continue reading →

Arbitration Clause Upheld In Coverage Dispute

Coverage disputes between US policyholders and non-US insurers like Underwriters at Lloyd’s of London continue to raise jurisdictional and related issues in US courts. The issues become further exacerbated when there is an arbitration clause in the insurance contract and the non-US insurer seeks to stay the coverage litigation and compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention), to which the US and the UK and most EU countries are signatories.

In a recent case, a Louisiana federal court, hearing the case after removal from the state court, granted the insurers’ motion to stay litigation and compel arbitration.

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 →

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: