Tag: discovery

A Brief Review of Reinsurance Trends in 2024

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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.

Read more: A Brief Review of Reinsurance Trends in 2024

Arbitration

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.

This article has been republished by Thomson Reuters in the Westlaw subscription service and on Westlaw Today.

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

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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.

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Reinsurance Information Up For Grabs

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Reinsurance information, be it reinsurance contracts, communications with ceding insurers and their reinsurers, broker communications or other related information, is frequently sought in coverage and personal injury litigation. In my latest IRMI.com Expert Commentary on Reinsurance I explore this issue once again, updating an earlier commentary. You can read the article on IRMI.com after registering for access, here.

A Brief Review of Reinsurance Trends in 2023

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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.

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Reinsurance Information Is Hard to Withhold

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In nearly every insurance coverage, bad faith or defense counsel legal malpractice case the insurance company is asked to produce reinsurance information and communications related to the underlying claim. This information is requested for the possibility that the insurance company has revealed something to the reinsurers that might help the policyholder or other counterparty. Whether reinsurance information is ever really helpful is a discussion for another day but what we do see from the courts is a clear trend toward compelling discovery of reinsurance information.

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Using US Federal Courts to Aide in Non-US Arbitrations Dealt a Death Blow By the US Supreme Court

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While it did not happen often, there have been occasions where insurance and reinsurance disputes outside the US looked to the US federal court to assist in discovery of documents or depositions in the US to aide the non-US arbitration. While the federal circuits were split, several circuits permitted the district courts to aide in the non-US arbitration.

In June 2022, the US Supreme Court addressed the issue of whether a non-US arbitration was a proceeding in a foreign or international tribunal so that the district court could aide in that proceeding under 28 U. S. C. §1782(a). Many articles and blog posts have been written about this case and I do not intend to get into the technical details of 1782(a) or the various arguments presented. I do, however, discuss below the ramifications for insurance and reinsurance arbitrations.

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Courts Continue to Order Production of Reinsurance Information

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Parties routinely seek reinsurance information in insurance coverage cases and the courts routinely allow those requests to go forward. Yes, each case is different and each request is different and the reinsurance information may be different as well so drawing a general conclusion is fraught with danger. Nevertheless, two recent cases continue the trend of requiring production of reinsurance information.

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A Brief Review of Reinsurance Trends in 2021

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The big headline from 2021 is that the Second Circuit struck the final death blow to Bellefonte. While long expected this decision ends a near forty-year saga of whether the limit of liability in a facultative certificate caps a reinsurer’s indemnity and expense obligations. Courts in 2021 also addressed numerous other reinsurance matters, including those about arbitration, arbitrability, and compelling arbitration in the face of the McCarran-Ferguson Act. 

2021 also brought us more cases concerning disclosure of reinsurance information and whether tortious interference claims belong in reinsurance. Courts also made decisions concerning runoff providers and reinsurance trustees.

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 2021, courts continued to exercise their authority to compel arbitration and leave many questions of arbitrability to the arbitrators. 

Arbitrability and Motions to Compel Arbitration

Who decides whether an arbitration should go forward is often a controversial issue. Is it the court or is it the arbitration panel? In Alliance Health and Life Insurance Co. v. American National Insurance Co., No. 20-cv-12479 (E.D. Mich. Aug. 31, 2021), the court determined that it was the arbitrators that had to decide whether a limitations provision in a reinsurance contract precluded arbitration.

The case involved a Medical Excess Reinsurance Agreement with a mandatory arbitration clause providing that no arbitration could be commenced more than three years after the effective date of the reinsurance contract. In this case, the arbitration was commenced after three years and the cedent claimed that because of that the arbitration provision no longer applied.

The court dismissed the complaint in part because the cedent did not dispute that it consented to arbitration when it signed the reinsurance contract, which bound the cedent to the arbitration provision. Because time limitations are a matter of procedure under Supreme Court precedent, and because there was no provision in the reinsurance agreement that required the court to determine questions of timeliness, the presumption in favor of arbitration stood and the limitations issue was for the arbitrators to decide. This case continues the trend of deference given by the courts to arbitration, especially where the arbitration provision is broad.

Two cases decided in 2021 brought the judicial trend of granting motions to compel arbitration together with the trend in several federal circuits holding that the McCarran-Ferguson Act does not reverse preempt the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).

In Green Enterprises, LLC. v. Dual Corporate Risks Limited, Civ. No. 20-1243(JAG) (D. PR. Jun. 15, 2021), the insurers moved to compel arbitration based on the New York Convention. The policyholder opposed the motion and sought to preclude arbitration based on the principle of reverse preemption under the McCarran-Ferguson Act and local insurance law precluding arbitration of insurance disputes.

The court granted the insurers’ motion to compel arbitration, holding that the McCarran-Ferguson Act did not enable Puerto Rico’s Insurance Code to reverse-preempt a treaty like the Convention, or the FAA itself, and that the arbitration provision invoked by the insurers was valid and applicable. This decision goes further than other decisions on this side of the circuit split by addressing preemption of the FAA.

In the second case, the Ninth Circuit joined several other circuits in holding that Article II, Section 3 of the New York Convention is self-executing and, therefore, arbitration can be compelled. In CLMS Management Services Limited Partnership v. Amwins Brokerage of Georgia, LLC, No. 20-35428 (9th Cir. Aug. 12, 2021), a policyholder sought to preclude arbitration of a claims dispute arguing that state insurance law (Washington) barred arbitration of disputes under insurance contracts. The non-US insurer sought to compel arbitration under the New York Convention. The district court granted the motion to compel arbitration.

In affirming the order compelling arbitration, the circuit court addressed the circuit split on this issue and, in a concise and well-reasoned decision, explained why McCarran-Ferguson did not apply and how the New York Convention, Art. II, Sec. 3, was self-executing. In summary, while the FAA’s Chapter 2 implemented the New York Convention—which may be reverse preempted by application of McCarran-Ferguson where there is an insurance law provision that bars arbitration of insurance disputes because it is an act of Congress—Article II, Section 3 of the New York Convention is self-executing and, as a Treaty and not an act of Congress, is not reverse preempted by McCarran-Ferguson and takes precedence over state law under the Constitution’s Supremacy Clause. Bottom line, the insurance dispute must be arbitrated.

Challenge to Arbitrator

Challenging the qualifications of an arbitrator is difficult. Most courts reject pre-arbitration challenges and require the objecting party to wait for a final award to raise a challenge. But sometimes the stars align, and the challenge is allowed. In 2021, a California federal court accepted the challenge on cross-motions to compel arbitration and disqualified a party-appointed arbitrator for not being disinterested.

In Public Risk Innovations, Solutions, and Management v. AmTrust Financial Services, Inc., No. 21-cv-035730-EMC (N.D. Calif. July 12, 2021), an objection was made to a party-appointed arbitrator as unqualified because of not being a current or former official of an insurance or reinsurance company and because of he was not disinterested. Both parties agreed that the underlying dispute was arbitrable and both parties agreed that the court should decide this dispute over the arbitrator’s qualifications.

The court rejected the challenge based on whether the arbitrator was qualified as a current or former official of an insurance or reinsurance company. The arbitrator was general counsel to several joint power authorities and self-insured joint power authorities and risk pools. The court held that in the context of the arbitration agreement the joint power authority could be seen as an insurance company, especially as a self-insured pool that essentially acts like an insurer.

Nevertheless, the court held that the arbitrator was not disinterested because he currently worked for entities that were members of the self-insured pool and could feel pressure to favor the pool’s position. Accordingly, the court found that the arbitrator was not qualified under the arbitration agreement.

Powers of the Arbitration Panel and Arbitration Awards

The great deference given to arbitrators and their awards is unquestionable in the US. Under the FAA, there is no appeal of an arbitral award. Parties can only seek to modify, vacate or confirm an arbitration award. The court’s scope of review of an arbitration award is narrow. Where, as in reinsurance arbitrations, arbitrators are given even greater leeway to decide cases—especially where there is an honorable engagement clause—the courts’ scope of review of an arbitration award is restricted even further.

In Continental Casualty Co. v. Certain Underwriters at Lloyd’s of London, No. 20-2892 (7th Cir. Aug. 23, 2021), after an arbitration hearing and the issuance of a final arbitration award, an interim arbitration award and a post final award order, the cedent sought to confirm the final award, but to vacate the last two orders. The panel, in its final award and the subsequent orders, decided not only the specific billing methodology question that reinsurers originally had presented, but also what the consequences of its ruling were for the three insured companies it named. And the panel clarified the question that remained after the final order about the applicability of its ruling to future billings relating to asbestos products losses for those three companies. The district court confirmed everything and the cedent appealed.

In affirming, the Seventh Circuit reiterated the limited scope of review given to arbitration awards by the courts. The court explained that an arbitral award must draw its essence from the contract. Accordingly, the scope of the agreement to arbitrate—whether the arbitrators were given a broad or narrow mandate—is critical to the narrow scope of review of an arbitration award. The court found several broadening factors that allowed the arbitration panel great discretion in interpreting the contract and devising a remedy, including the power to resolve the case on general principles, not just legal entitlements. The court held that the arbitration panel acted within the authority conferred by the contract. Because the court concluded that the arbitrators did not stray beyond the boundaries of their authority, the court affirmed the district court’s order confirming of all three awards and orders.

The trend toward upholding arbitration awards was also demonstrated in Adventure Motorsports Reinsurance , Ltd. v. Interstate National Dealer Services, Nos. S21G0008, S21G0015 (Ga. Sup. Ct., Dec. 14, 2021), where the Georgia Supreme Court reversed the court of appeals finding of manifest disregard of the law and remanded the matter.

After an arbitration award was issued, cross-motions were made to vacate and confirm. The trial court confirmed the award and an appeal ensued where the court of appeals vacated the award based on manifest disregard of the law by the arbitrator who the court said explicitly rejected the contract language. On appeal to the Georgia Supreme Court, the court reversed and remanded.

In reversing the court of appeals, the supreme court concluded that the court of appeals erred in reversing the confirmation of the award on the basis that the arbitrator manifestly disregarded the law in rendering the award. The court analyzed the law on manifest disregard and commented that an arbitrator who incorrectly interprets the law has not manifestly disregarded it. The court found that the arbitrator never expressed, during the hearing or in the arbitration award, that the correct law should be ignored rather than followed. Ultimately, the court held that the arbitration award drew its essence from the contracts. The court, however, remanded the decision back to the court of appeals for resolution of the argument that the arbitrator overstepped his authority in making the award and reconsideration of the trial court’s failure to enforce a delayed-payment penalty provided in the arbitration award.

The key point here is that even in state court under state arbitration law, manifest disregard of the law is a very difficult standard to meet when seeking to vacate an arbitration award. Arbitrators have wide discretion and just like in the federal courts, if the award draws its essence from the terms of the disputed contract, the award likely will be confirmed.

When parties participate in an arbitration and obtain a final award, usually that is the end of the dispute. But sometimes there are collateral agreements involved and the losing party may try to bring litigation based on those collateral agreements to obtain a different form of relief.

In White Rock Insurance Co. PCC Limited v. Lloyd’s Syndicate 4242, No. 652867/2020 (N.Y. Sup. Ct., N.Y. Cty May 18, 2021), a protected cell reinsurer sued its cedent seeking a declaration that certain provisions of a trust agreement extinguished its liability to the cedent. The cedent moved to dismiss the litigation based on a prior arbitration proceeding between the parties and the final arbitration award issued by the arbitration panel.

In granting the motion to dismiss and confirming the final arbitration award, the court held that the prior arbitration and the final arbitration award precluded this litigation. The court noted that the arbitration panel’s finding, that the collateral release did not change the reinsurer’s obligation to pay losses as they became due under the reinsurance contract despite the shortfall in the collateral in the trust fund, went to the heart of the issue in this litigation. The court pointed out that the reinsurer specifically argued that the trust fund provisions relieved it of its obligations to the cedent and asked the arbitration panel to rule on the trust fund provisions even though the trust fund did not have an arbitration clause. The court held that the arbitration panel clearly considered the trust fund issues raised in the litigation in reaching its determination.

Follow-the-Settlements/Bellefonte

For decades, reinsurers and the courts relied on the Second Circuit’s holdings in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993), to cap a reinsurer’s liability under certificates of facultative reinsurance for indemnity and expenses. This reliance was sharply criticized by cedents and others in the industry. In 2021, the Second Circuit made it clear that its decisions in Bellefonte and Unigard are no longer good law.

In Global Reinsurance Corp. of America v. Century Indemnity Co., No. 20-1476 (2d Cir. Dec. 28, 2021), the Second Circuit addressed an appeal from a district court judgment denying the reinsurer’s request for a declaratory judgment that the stated limits in 10 facultative certificates capped the reinsurer’s liability for both indemnity and expenses. In affirming, the court held that the certificates’ policy limits were not inclusive of defense costs and announced that its earlier decisions on this subject were no longer good law.

The court, in affirming and holding that the reinsurer’s obligation to pay its proportionate share of the cedent’s defense costs was not capped by the certificates’ liability limits, concluded as follows:

Because the certificates do not specifically provide that the terms of [the reinsurer’s] reinsurance differ from those of the [cedent’s] policies with respect to the treatment of defense costs, the follow-form clause requires that [the reinsurer’s] payments toward [the cedent’s] defense costs be made in addition to the certificates’ limits. This conclusion follows not only from the unambiguous language of the certificates but also from evidence of custom and usage concerning the central importance of concurrency to the reinsurance market when the certificates were issued.

Notably, concerning Bellefonte and Unigard, the court explained that the New York Court of Appeals’ holding on the Second Circuit’s certified question:

. . . conflicts with our decisions in Bellefonte and Unigard, in which we held that the liability limits contained in the certificates at issue “necessarily cap[ped] all obligations owed by [the] reinsurer[s], such as defense costs, without regard for the specific language employed therein.” . . . Because [the New York Court of Appeals decision] exposed a fundamental conflict between these precedents and “New York law as determined by the New York Court of Appeals,” which we are “bound to apply,” . . . , we are “require[d] to conclude” that Bellefonte and Unigard are “no longer good law.” (citations omitted).

The bottom line: Bellefonte now resides in the scrapheap of wrongly-decided cases.

Even before Global Reinsurance Corp. of America was decided, an earlier 2021 decision by the Second Circuit foreshadowed the renewed focus on contract wording. In Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., Nos. 19-1241; 19-4335 (2d Cir. Jul. 29, 2021), the Second Circuit was faced with two appeals of two district court judgments that went in opposite directions. The cases primarily concerned whether the reinsurers must reimburse the cedent for defense costs in addition to limits of the cedent’s umbrella policies. In one case, the court, after a bench trial, held that the reinsurer did not have to reimburse defense costs in addition to the limits. In the other case, after a jury trial, the court held that the cedent was entitled to reimbursement for defense costs in addition to the limits. Obviously, the opposite results could not stand.

The circuit court affirmed the bench trial judgment (no reimbursement on a costs-in-addition basis – victory to the reinsurer) and reversed and remanded, in part, the jury trial judgment. In making its decision, the court addressed whether an amendment to the umbrella policy changed the policy from cost-inclusive to cost-in-addition. The court found that the amendment only affected the drop-down coverage, not the excess coverage, and changed the how expenses would be reimbursed only for the drop-down coverage. Accordingly, the cedent was not entitled to reimbursement for expenses in addition to the limit.

Nevertheless, the cedent argued that the follow-the-settlements doctrine required the reinsurer to pay the settlement anyway. The court rejected this argument.  Because the underlying settlement treated the umbrella policy as cost-inclusive, it contradicted the cedent’s position that the reinsurer must pay on a cost-in-addition basis.

Additionally, the court found that the follow-form facultative certificates linked the reinsurer’s liability to that of the cedent and under the umbrella policies, expenses were cost-inclusive. As the court noted, a follow-the-settlements clause does not alter the terms or override the language of the reinsurance contracts. Accordingly, the court held that the underlying settlement agreement did not independently require the reinsurers to pay defense costs in addition to the limits.

Discovery and Sealing

              Production of Reinsurance Information

Reinsurance information is now regularly requested by plaintiff’s lawyers in underlying coverage disputes.  Courts tend to allow this discovery, although it is sometimes limited to just the reinsurance contracts. 

In U.S. Tobacco Cooperative, Inc. v. Certain Underwriters at Lloyd’s, No. 19-cv-430-BO (E.D.N.C. Apr. 9, 2021), the court addressed the policyholder’s second motion to compel discovery against the insurers. The court ordered broad production of reinsurance materials based on the automatic disclosures required under Rule 26(a)(1)(A), which required the insurers to identify and produce any relevant reinsurance agreements if the reinsurers may be liable for paying part of a judgment against the insurers.

The court also addressed the insurers’ claim that the reinsurance materials were protected by the attorney-client or attorney work-product privileges. The court analyzed the parameters of the privileges and instructed the insurers to only withhold documents if they had a good faith belief that the communications related to the provision of legal services.

On the production of reinsurance materials, the court noted that the cases conflict on the issue. The court rejected the insurers’ argument that the policyholders had not shown the reinsurance information to be relevant because the burden is on the insurers to show a lack of relevance. The court found that the insurers presented no evidence showing that the reinsurance documents should be immune from discovery. No affidavits or other evidence were presented, just unsworn statements in the briefs.

Additionally, the court found that the insurers had waived the privileges because there had been both deposition testimony and some document production of reinsurance information. Accordingly, the court ordered production of the requested reinsurance documents.

There are many approaches used to resist production of reinsurance information. In 2021, one case involved the insurer invoked the “insurer-insured privilege.” In Gibson v. Chubb National Insurance Co., No. 20-CV-1069 (N.D. Ill. Sep. 27, 2021), a coverage dispute arose concerning a fire loss. During the litigation, the policyholder filed a motion to compel production of documents, including, among other things, reinsurance information. The insurer claimed insurer-insured privilege.

In granting the motion to compel, the court found that the insurer was not entitled to withhold communications with its reinsurer about the policyholder’s claim. The insurer attempted to bring the communications within an offshoot of the attorney-client privilege that related to the duty to defend the underlying claim. Illinois courts have held that communications between an insured and an insurer where the insurer has a duty to defend is privileged and that has been extended to agents of the insurer. The court rejected the argument that communications between the insurer and the reinsurer fell within the privilege. Here, the reinsurer had no duty to defend, and the court directed the insurer to produce the communications.

What happens to reinsurance-related evidence when it comes to trial? In 2021, a court answered that question. In Fluor Corp. v. Zurich American Insurance Co., No. 4:16CV00429 ERW (E.D. Miss. Jul. 16, 2021), the parties made a variety of motions in limine in advance of trial in an insurance coverage dispute. One of the insurer’s motion was to exclude evidence of reinsurance, including communications with its reinsurers concerning the underlying claims. The policyholder argued that many trial exhibits mentioned reinsurance and that it was not practical or justified to redact all those exhibits.

The court granted the motion based on Rule 411 of the Federal Rules of Evidence and cited a series of 8th Circuit cases on the prejudicial nature of allowing evidence of insurance or reinsurance. The court held that the evidence of reinsurance posed a high risk of prejudice to the insurer.

              Sealing

Reinsurance arbitrations are typically confidential and generally proceed with a confidentiality agreement in place protecting all arbitration information, including the final award, from disclosure. This contrasts with legal proceedings, including proceedings collateral to arbitrations, where generally the public’s right to judicial documents outweighs the parties’ privacy. In recent years, when parties to reinsurance arbitrations have gone into court to confirm, enforce, modify or vacate arbitration awards, courts have been reluctant to keep the final awards under seal. In fact, some parties have used this trend as a litigation strategy to “unseal” confidential final arbitration awards by going to court to confirm an award where there was no indication that the losing party would not comply with the award.

Bucking that trend in 2021, a New York federal court allowed the final arbitration award to remain sealed. In West Coast Life Insurance Co. v. Swiss Re Life & Health America, Inc., No. 21 Civ. 5317 (VB) (S.D.N.Y. Jun. 28, 2021), a final arbitration award was issued and both parties filed the award with the federal court under seal and moved to confirm the award.

Of course, the court confirmed the award as there was no objection and both parties agreed to confirmation and both parties requested that the final award be sealed in the first instance and remain sealed. The court noted that generally arbitration awards filed with a petition to confirm that award are considered “judicial documents that directly affect [] the Court’s adjudication of that petition,” and therefore sealing of the award requires that the movant demonstrate that “sealing is necessary to preserve higher values.” (Citation omitted).

Here, however, the court decided otherwise. The court’s rationale for keeping the award sealed is set forth below:

[B]ecause the parties jointly request that the Court confirm the final award, the final award itself does not “directly affect the Court’s adjudication of that petition.” Thus, the final award is not a “judicial document” subject to a presumption of access. Moreover, the Court is persuaded by the parties’ assertion that the final award should be sealed because it is subject to a confidentially agreement and contains confidential, sensitive, and proprietary information that could potentially prejudice the outcomes of related legal disputes not before the Court as well as prejudice the parties in future competitive business negotiations.

Obviously, those who wish to keep reinsurance arbitration awards confidential are overjoyed with this decision given the many other cases that have gone the other way. This outcome, however, likely will not hold up where there is a dispute about the award or where one party is opposing confirmation.

Direct Right of Action

Policyholders typically cannot sue reinsurers directly because of a lack of contractual privity. While there are exceptions in the law, those exceptions are few. But sometimes a reinsurance deal gets structured in such a way that the policyholder may be able to bring a direct action.

In Casa Besilu LLC v. Federal Insurance Co., No. 20-24776-Civ-Scola (S.D. Fla. Apr. 23, 2021), a policyholder claimed that to obtain property insurance for its property in the Bahamas it approached the reinsurers for assistance. The complaint alleged that the reinsurers engaged local brokers to obtain the insurance from a Bahamian insurer and the reinsurers provided the reinsurance. The complaint further alleged that the policyholder never dealt with the local brokers and that they filled out an insurance application given to the reinsurers requesting comprehensive liability and property insurance at specific limits, including flood insurance.

According to the complaint, flood insurance was never obtained and when a hurricane caused damage to the property, the Bahamian insurer refused to pay for any of the damages caused by storm surge. There are more facts alleged, including that the reinsurers interfered in the process and caused the Bahamian insurer to calculate water damage separate from wind damage.

Naturally, the reinsurers moved to dismiss the complaint, which contained claims of tortious interference, breach of fiduciary duty and other claims. They argued, among other things, that there was no privity of contract and, therefore, not direct right of action. The policyholder countered that they were not suing under the reinsurance contract, but for the reinsurers’ tortious interference with the policyholder’s direct insurance contract.

The court denied the motion to dismiss. Basically, the court found that the complaint had sufficient allegations to survive the motion to dismiss and the court would not convert the motion to one for summary judgment (both sides submitted evidentiary affidavits that the court would not consider).

This is an unusual case because of the relationships between a policyholder and an insurance group that typically writes direct insurance and the insurance group’s alleged involvement with placing insurance in the Bahamas and then reinsuring that insurance. Whether the policyholder will be successful in the end will require a much more detailed inquiry into the facts.

A direct right of action may arise if there is a cut-through clause in the reinsurance contract. Cut-through clauses, however, must be express. In Wells Fargo Bank, N.A. v. Lloyd’s Syndicate AGM 2488, No. 13956 (N.Y. App. Div. 1st Dep’t Jun. 1, 2021), the motion court granted facultative reinsurers’ motion to dismiss the policyholder’s claims against them and the appellate court affirmed finding that “[n]one of the reinsurance contracts at issue, including the January 4, 2010 Underwriters Reinsurance Policy (URP), issued by Lloyds contain a “cut through” provision allowing the original insured [ . . . ] to bring suit directly against the reinsurers.” The court also ruled that the policyholder’s interpretation of the reinsurance contract would lead to an absurd result and was contrary to the parties’ reasonable expectations.

Tort of Bad Faith

Can tort claims be brought against reinsurers for bad faith? In Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20cv300-MHT, 2021 WL 981495 (M.D. Al. Mar. 16, 2021), a federal court had to decide whether, under Alabama law, the tort of bad faith is recognized in the reinsurance context. In dismissing the bad faith claims, the court performed a detailed analysis of Alabama law and articulated how narrowly Alabama interpreted the tort of bad faith. Essentially, Alabama had narrowed the tort down to the consumer-based insurance relationship and refused to apply the tort to general commercial contracts.

The court distinguished the difference in motivation and sophistication between a reinsurance transaction and a standard insurance transaction in concluding that the Alabama Supreme Court would not extend the tort of bad faith to a reinsurance dispute.

In a later decision, Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 20 cv 300-MHT (M.D. Ala. Apr. 12, 2021), the cedent moved the federal court to certify to the Alabama Supreme Court the question of whether Alabama recognizes the tort of bad faith in the reinsurance context. The court rejected the motion holding that certification would be neither necessary nor appropriate.

Runoff Managers

The proliferation of runoff providers for books of reinsurance has generated disputes involving runoff managers. For example, in Stonegate Insurance Co. v. Fletcher Reinsurance Co., No. 21 C 3523 (N.D. Ill. Dec. 6, 2021), the cedent sued a reinsurer that had been acquired by a runoff entity and two affiliated service providers for breach of contract, tortious interference with contract, and bad faith refusal to pay claims over reinsurance agreements between the cedent and the reinsurer’s predecessor. The reinsurer defendant moved to compel arbitration under the reinsurance agreements and the service provider defendants moved to dismiss the complaint for lack of personal jurisdiction and failure to state a claim for relief.

The district court granted the reinsurer’s motion to compel arbitration, which the cedent did not oppose. On the service providers’ motion to dismiss, the court rejected the personal jurisdiction argument, but ultimately found that the complaint did not state a claim against the service providers. The court found that the service providers were agents of the reinsurer and, therefore, they were conditionally privileged against a claim that they intentionally interfered in the contractual relationship of their principal. The court held that the allegations in the complaint did not rise to the level of malicious or unjustified conduct, which would have negated the conditional privilege.

In another case, a court addressed claims brought by cedents against the reinsurer’s runoff manager for intentional interference with contractual relations and inducing breach of contract when the claims stopped being paid. In California Capital Insurance Co. v. Enstar Holdings US LLC, No. 20-cv-7806-ODW (C.D. Calif. Apr. 14, 2021), a group of cedents brought suit against the runoff manager of its reinsurer for intentional interference with contractual relations and inducing breach of contract. The cedents alleged that after the reinsurer’s business was transferred to the runoff entity, the claims process changed, and the manager directed the reinsurer to breach its reinsurance obligations. Additionally, the cedents alleged that the reinsurer stopped paying certain losses and demanded the return of reinsurance proceeds already paid under certain categories of  taxi and limousine livery, trucking, and habitability claims.

The runoff manager moved to dismiss the complaint. The court granted the unopposed portion of the motion dismissing the case against the runoff manager’s holding company but denied the motion as to the rest of the runoff manager’s entities. The court found that the complaint provided sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively, even though the cedents did not allege exactly how the runoff manager directed the reinsurer to breach the treaty. The court refused to grant the motion to dismiss because the complaint was sufficient under pleading standards to withstand the motion.

Reinsurance Trustees

Reinsurance agreements with non-US off-shore reinsurers usually involve a reinsurance trust with a bank acting as trustee. These trust agreements typically absolve the trustee from nearly all liability because of their ministerial role in the reinsurance transaction. This is very common in off-shore life, annuity and long-term care reinsurance agreements.

In the last several years, however, trustees have come under scrutiny because some off-shore reinsurers were not quite on the up-and-up and the assets placed in the trust accounts and managed by the reinsurers’ affiliated investment managers have been substandard. This, of course, has caused the reinsurance arrangement to collapse, regulatory issues and often the total loss of the assets meant to secure the cedent’s losses. Because these reinsurers typically do not have assets on shore, some of their cedents have gone after the trustees seeking damages.

In Bankers Conseco Life Insurance Co. v. Wilmington Trust, National Association, No. 13185 (N.Y. App. Div. 1st Dep’t Apr. 20, 2021), a long-term care reinsurance deal resulted in serious problems for the cedent when the regulator declared that many of the assets in the trust account were not eligible assets. Not only were the assets not eligible, but they were non-negotiable. The cedent was forced to recapture the business and terminate the reinsurance agreements while taking a substantial loss. The reinsurer, which was not involved in this lawsuit, was the alter ego of a private equity fund that devised a scheme to defraud insurance companies.

While the trust agreement limited the trustee’s liability and responsibility—it was not responsible to determine whether the assets were eligible under state law to be placed into a reinsurance trust account—the agreement did have certain provisions that the court found important:

However, the agreements did provide that [the trustee] was not to accept into the trusts any “non-negotiable” assets, meaning assets that were not capable of being liquidated at a moment’s notice without the need to clear any administrative hurdles. Further, the agreements provided that [the trustee] would “only be liable for its own negligence, willful misconduct, or lack of good faith in connection with its performance” and that “in no event shall [the trustee] be liable under or in connection with this . . . Trust Agreement for indirect, special, incidental, punitive or consequential losses or damages of any kind whatsoever.”

In reversing the motion court and reinstating the causes of action for breach of contract and breach of fiduciary duty against the trustee, the court agreed with the cedent that the breach of contract claim was prematurely dismissed prior to factual and expert discovery. On the breach of fiduciary duty claim, the court held that the trustee’s designation raised the question of whether the trustee owed a fiduciary duty to the cedent as beneficiaries of the trust separate from the trustee’s contractual duties under the trust agreement.

Cases like these are important to financial institutions that serve as reinsurance trustees but are more important lessons to cedents who are attracted to off-shore deals that may be too good to be true. Keeping a watchful eye on the character and quality of the assets in any trust agreement or funds withheld account where the reinsurer is managing the investments through a related affiliate is crucial to avoiding what happened to the ceding company in this (and related) cases.

The Relevance of Reinsurance Information in a Coverage Dispute

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Among the discovery sought in many insurance coverage disputes is reinsurance information. This may include the reinsurance contracts that reinsure the underlying policies and communications between the cedent and reinsurer concerning the reinsurance contract or the underlying losses. Courts have been all over the place on this issue, with some only allowing production of the relevant reinsurance contracts and others allowing broad discovery into all facets of reinsurance material.

In a recent case, the court granted reinsurance discovery and found that the insurers failed to meet their burden to avoid production.

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