Freestone Insurance Company is a Delaware-domiciled insurer that has been placed in liquidation. U.S. Bank National Association served as the trustee under a reinsurance trust agreement (the “Trust Agreement”) between Freestone and Companion Property and Casualty Company (“Companion”). The trust agreement secured a reinsurance arrangement that allowed Freestone to do business through Companion in jurisdictions where Freestone was not admitted to sell insurance. Under the arrangement, Companion wrote policies as a “fronting insurer” on Freestone’s behalf, and Freestone reinsured the risks under those policies. The trust agreement required Freestone to place collateral into a trust account for Companion’s benefit, in order to secure Freestone’s reinsurance obligations. In its capacity as trustee, U.S. Bank had various duties related to the collateral. After Freestone failed to make certain payments under the reinsurance arrangement, Companion sought to draw down on the collateral, the value of which was insufficient to cover the claims being made under the reinsured policies. As a result, Companion sued U.S. Bank in federal court in South Carolina for damages, alleging that U.S. Bank breached its obligations as trustee by permitting Freestone to place poor quality collateral in the trust account (the “South Carolina Action”).
As part of Freestone’s liquidation claims process, which is governed by Delaware’s Uniform Insurers Liquidation Act (the “Uniform Act”), U.S. Bank filed certain claims notices against Freestone that relate to the South Carolina Action. U.S. Bank also sought to assert third-party claims against Freestone in the South Carolina Action for contribution and indemnification, and thus filed a motion with the Delaware Chancery Court seeking to lift the anti-suit injunction set forth in the Freestone liquidation Order that barred third-party claims against Freestone other than through the liquidation claims process. The Chancery Court denied U.S. Bank’s motion, finding that granting such relief would contravene the Uniform Act, interfere with the liquidation claims process and impose unnecessary and unwarranted costs on Freestone and the Delaware Insurance Commissioner as Freestone’s statutory receiver. In the Matter of the Liquidation of Freestone Insurance Company, Case No. 9574-VCL (Del. Chancery Ct. July 7, 2016).